
Class _i2Jlii/^ 

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COPflRlGHT DEPOSIT. 



THE CITIZEN'S LIBRARY 



OF 



ECONOMICS, POLITICS, AND 
SOCIOLOGY 



EDITED BY 
RICHARD T. ELY, Ph.D., LLD. 

DIRECTOR OF THE SCHOOL OF ECONOMICS, 

POLITICAL SCIENCE, AND HISTORY, 

UNIVERSITY OF WISCONSIN 






THE ECONOMICS OF DISTRIBUTION 




;7^2^^^ 



THE CITIZEN'S LIBRARY 



The 



Economics of Distribution 



BY 



JOHN A. HOBSON 

AUTHOR OF "THE EVOLUTION OF MODERN CAPITALISM" 
"JOHN RUSKIN," "SOCIAL REFORMERS," ETC. 



THE MACMILLAN COMPANY 

LONDON : MACMILLAN & CO., Ltd. 
1900 



All rights reserved 






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MAR 9 61900 

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''^APR4-ier 



COPTEI&HT, 1900, 

By the MACMILLAN COMPANY, 



HRST COPY 



Notfajooti ^regg 

J. S. CuBhing & Co. — Berwick & Smith 
Norwood Mass. U.S.A. 






PREFACE. 

This work endeavours to construct an intel- 
ligible, self-consistent theory of Distribution by 
means of an analysis of those processes of bar- 
gaining through which economic distribution is 
actually conducted, the results of industrial co- 
operation being apportioned to the owners of the 
factors of production in the several stages of 
production. 

The chief difficulty lies in coordinating the 
different factors of production, so as to bring the 
payments made respectively for the use of land, 
labour, and capital under a common law of price, 
and in showing that the same economic forces 
which determine the market and normal prices 
of commodities are applicable to the sale of all 
these uses of the factors of production. 

The extension to all these cases of the termi- 
nology and modes of measurement hitherto con- 
fined to land, or extended tentatively and by 
analogy to certain other factors, involves a com- 
plete restatement of some of the problems of 
wages and interest. But this unification of the 
different processes of economic payment has long 



vi PREFACE. 

been felt to be necessary to the construction of 
a satisfactory theory of distribution, and various 
approaches in this direction have been made. 
This work claims to go farther and to reach a 
common law of price applicable to every sort of 
sale. 

Some of the reasoning is difficult because it 
involves a necessary abandonment of commonly 
accepted terminology and the establishment of a 
new system of economic notation. If, however, 
the reasoning is valid, it establishes certain im- 
portant theoretic conclusions, some of which are 
fraught with large implications in the direction 
of progressive politics. 

In particular, it claims to prove that all pro- 
cesses of bargaining and competition, by which 
prices are attained and the distribution of wealth 
achieved, are affected by certain elements of force 
which assign "forced gains" and other elements 
of " economic rent " to the buyers or the sellers. 
There is thus established the existence of a large 
fund, partaking of the nature of those monopoly 
and differential rents, long ago recognised in the 
case of land, which furnish no stimulus to volun- 
tary industrial energy, and which can be taken 
for public service by taxation without injury to 
industry. 

Much of the material of this work was given 
in the form of lectures to students of the London 
School of Economics and Political Science in 1897, 



PREFACE. vii 

and parts of several chapters have appeared in the 
Harvard Quarterly Journal of Economics. Since 
receiving the first proofs of this book, a little 
volume has come into my hands, entitled "The 
Theory of Wages," by Mr. H. M. Thompson, 
which works out independently some of the main 
points of my criticism of current theories, in par- 
ticular of the fundamentally erroneous doctrine 
that " Rent does not enter into the Expenses of 
Production." 

JOHN A. HOBSON. 



CONTENTS. 

OHAPTBS PAOB 

I. The Determination of a Market-price • . 1 
II. Producer's and Consumer's Rents ... 41 

III. The Determination of Long-period Prices and 

of Value <...... 55 

IV. The Law of Rent as the Basis of Coordination 

of the Factors of Production . . .113 

V. The Grading of Labour and Capital. Marginal 

and Differential Payments .... 160 

VI. The Coordination of the Factors of Production. 
Effects on the Theory of Price and Distri- 
bution ........ 193 

Vn. Bargains for the Sale of Labour-power . . 218 

Yin. Bargains for the Use of Capital . . .227 

IX. Bohm-Bawerk's Positive Theory of Caj ital . 266 

X. The Theory of Surplus Value — Its Influence 

upon Distribution ..... 295 

ix 



THE ECONOMICS OF DISTEIBUTION. 

CHAPTER I. 

THE DETERMINATION OP A MARKET-PRICE. 

§ 1. "I am unaware of any rule of justice appli- 
cable to the problem of distributing the produce of 
industry," wrote Professor J. E. Cairnes, and it is 
common to find in modern economic treatises gen- 
eral expressions of dissatisfaction with existing 
methods of apportioning wealth among those who 
have contributed to its production. But there is 
little agreement as to the nature of the defects in 
present modes of distribution, nor does the analysis 
of economic processes commonly adopted by those 
who indulge in these expressions of dissatisfaction 
fully justify any such general condemnation. The 
economic power of landowners, the establishment 
of trade monopolies or combinations, the weakness 
of poorer classes of labourers in bargaining with 
employers, are commonly regarded as defects of 
the existing industrial order. But the recognition 
of these defects is quite consistent with a convic- 
tion that the general and normal tendency of com- 
petitive industry makes for a fair and satisfactory 



2 TRE ECONOMICS OF DISTRIBUTION. 

distribution of the fruits of industry. For the 
specific defects named above are seen to be closely 
associated with restraints of competition, and may 
plausibly be regarded as exceptions which by no 
means justify a general condemnation of the justice 
or utility of a system of distribution based upon 
freedom of competition. 

§ 2. In order to test the character of distri- 
bution fairly, we must study it under normal 
not under exceptional circumstances, and in its 
constituent acts. Distribution is composed of, or 
achieved by, transactions which, for lack of any 
better term, we call bargains. Much investiga- 
tion has taken place of certain classes of bargains, 
particularly in reference to sales of the use of the 
factors of production, and special laws of rent, 
wages, interest, have been founded upon these 
studies. The general effect of these studies 
among earlier economists was to break up the 
unity of industry: first, by suggesting that bar- 
gains for the use of land, of capital, and of labour- 
power were subject to radically different laws; 
secondly, by failure to relate these laws of the 
value or the price of the factors of production to 
the laws which were found to determine the price 
of the commodities which they contributed to 
produce. More recent economic writers have 
made considerable advances toward the integra- 
tion or unification of a theory of Distribution, by 
relating the theories of determining the price of 



DETERMINATION OF A MARKET-PRICE. 3 

the several factors through an extension of the 
law of differential rents, and by a scientific formu- 
lation of a theory of value which is applicable to 
the determination of all prices, alike of uses of 
factors and of commodities. 

But the completion of this work of unifying 
the theory of Distribution has been delayed by a 
refusal of economists to investigate sufficiently the 
nature of the bargain per se, so as to find what is 
common to its different species. So far as Eng- 
land is concerned, this refusal is due to a visible 
reluctance among students to engage upon purely 
deductive or speculative problems, except within 
a certain narrow field of mathematical analysis. 
The dominance of the historical spirit on the one 
hand, and the rapid advance of Specialisation in 
economic study on the other, have unduly drawn 
attention from the root-problems of deductive 
economics, which are too often assumed to have 
been solved, or not to be worth the trouble of solu- 
tion. To these influences I chiefly attribute the 
small amount of intellectual energy devoted to the 
investigation of the process of bargaining which 
lies at the base of the theory of Distribution. 

Such study requires the moderate use of a method 
which is peculiarly disfavoured by English econo- 
mists of the present day, and is stigmatised as 
"Crusoe economics." This recent revolt against 
speculations, which were barren or illusive because 
they commonly proceeded from false premises, has 



4 THE ECONOMICS OF DISTBIBUTION. 

gone too far. Such speculative analysis, with all 
its dangers, is indispensable to the social sciences. 
The conditions of inductive reasoning from experi- 
ments, which exist in many branches of physical 
science, are here notoriously lacking, and to sup- 
ply this defect a process of fictitious experiment 
is substituted, supposititious cases being framed 
where unessential circumstances are eliminated, so 
as to enable us to see more clearly the working of 
certain simple forces. 

To study problems of price or value, by plung- 
ing into the full intricacy of actual business, is not 
really a practical but a most unpractical method. 
To go back to a thoroughly uneconomic condition 
is usually unprofitable ; but to take, first, cases 
true to the essential facts of life, though contained 
in a simpler setting of circumstances than that in 
which they are actually found, and afterward to 
introduce the excluded circumstances gradually, 
in order to see what difference is wrought, — such 
substitute for the experimental method of the 
physical sciences is both defensible and highly 
profitable as a mode of gradual approach toward 
a real issue. This method I propose to adopt in 
opening up the nature of a bargain. 

§ 3. Bargains are found commonly in clusters at 
a market-price, being acts of sale or exchange at 
this common rate. It is therefore first essential 
to understand how this common price-point is 
determined. 



DETERMINATION OF A MARKET-PRICE. 5 

If A wishes to sell a horse and B is the only- 
buyer, it is evident that, if the highest price B 
is willing to give does not reach the lowest point 
A is willing to take, there can be no price and no 
sale. 

A asks X20 and fixes reserve at <£15. 

B offers £8 and fixes reserve at £\2, 

A's offers, 20 19 18 17 16 15 



B's offers, 12 11 10 9 8 

Next suppose A willing to take ^15, while B 
is willing to give X18. If a sale takes place, the 
price will obviously lie in the common ground be- 
tween c£18 and X15. But at what point and how 
is the point reached? Professor Hadley assumes 
that a point will be reached and thinks it is deter- 
mined by "relative skill in bargaining."^ 

A, 20 19 18 17 16 15 



B, 18 17 16 15 14 13 12 11 10 9 8 

But this attainment of a price by "skill of bar- 
gaining " implies ignorance of each other's mind 
in the case of A and B, or either. If A knows 
or thinks that B will go to £18 and B does not 
know that A will sell at <£15, A will stand firm 
at .£18 and get that price ; if, per contra^ B knows 
that A will sell at <£15 and A does not know that 

1 Hadley's Economics^ p. 73. 



6 THE ECONOMICS OF BISTBIBUTION. 

B will go to £18, B gets his horse at £15. If 
neither knows but each suspects the other will go 
further, "bluff" is the determinant; the bidding 
proceeds until either A or B believes that any 
further demand will outstep the limit set by the 
other in his mind and will lose him the bargain. 
The determinant here is superior cunning, or, as 
Hadley says, "skill in bargaining." Or it may 
be that while A is willing to sell at £15, he may 
know or suspect that it is more important for B 
to obtain the horse than for him to sell, in which 
case he is in the position to extort £18. 

So far we have no element of competition : the 
process by which a price is reached, if it is reached, 
is one of bargaining from beginning to end. 

Now introduce the competitive element upon 
one side of the transaction. A, the happy owner 
of the horse, which he will sell for £15 or as much 
more as he can get, is faced by B and C, who both 
want the horse and are furnished with effective 
demand in the shape of cash. Now B and C 
either set the same limit-price upon A's horse, or 
they set a different limit-price. If it is equally 
important to both to get the horse, and they are 
possessed of equal pecuniary resources, they may 
conceivably be both willing to bid up to £18 for 
the horse. In such a case it is a matter of absolute 
indifference to A whether, after making B and C 
bid against each other up to £18, he sells to B or 
to C. Indeed, the casuist would rightly argue 



DETEBMINATION OF A MARKET-PRICE. 1 

that, since he could not sell to both, and there 
was no more reason why he should sell to one 
rather than to the other, he could not sell at all ; 
but would stand like the Ass of the Fable, who 
starved to death as he stood at an equal distance 
from two equally attractive bundles of hay. But 
elbowing aside our casuist and allowing A to effect 
a sale at X18 to either B or C, guided by some 
personal preference or the prospects of future 
business with the respective parties, it is plain 
that the competition between B and C has simply 
placed A in the same position of bargaining supe- 
riority as he would occupy in dealing with B alone, 
on the assumption that he knew the limit-price B 
had set himself, while B did not know his limit- 
price. The actual price reached would assign to 
A the whole gain of the bargain, less the mini- 
mum required to compensate B or C for the 
trouble of bargaining. 

But the chance of B and C fixing the same price- 
limit and adhering to it with equal persistency is 
infinitely small. In the actual business world we 
may take it that the two competitors fix a different 
price-limit, — 

A, 20 19 18 17 16 15 

B, 19 18 17 16 15 M 

C, 18 17 16 15 14 

B's limit is .£19, and C will not go beyond .£18. 
Here it will be evident that competition does not 



8 THE ECONOMICS OF DISTRIBUTION. 

fix the price-point, but only a lower limit of price. 
The price actually reached cannot be less than X18, 
because B and C will bid against each other up to 
that point. It may be anywhere between £18 and 
£19 ; and the actual point will be determined, not 
by competition, but by those same forces of skill 
and force in bargaining which operated in the 
earlier case. 

§ 4. Now arises the question : Is the method of 
determining a price essentially different when we 
place upon both sides of the transaction a number 
of genuine competitors, in other words, when we 
institute a free market ? 

What is the determination of a market-price? 
It is curious to observe how the text-books of 
English economists have, almost without excep- 
tion, shirked or slighted this practical question, 
hurrying the reader to the more abstract con- 
sideration of a normal price, and contented, as 
was Mill, to explain any particular divergence of 
market-price from normal price by vague refer- 
ence to temporary fluctuations in supply and 
demand, which kept market-prices oscillating 
round a normal price, giving the advantage now 
to sellers, now to buyers.^ 

It has generally been considered a satisfactory 
account to say that the competition between own- 
ers of supply on the one hand and exercisers 

1 J. S. Mill, Principles of Political Economy, Bk. Ill, 
Ch. II, § 4. 



DETEBMINATION OF A MABKET-PRICE. 9 

of demand on the other hand will equalise sup- 
ply and demand at some point of price. This is 
Mill's contribution toward the theory of a market- 
price,^ and it may be said to be generally received 
in English economic text-books as a sufficient 
description of a market-price. Professor Mar- 
shall, in discussing the price of the corn market, 
finds it to be such as would " exactly equate sup- 
ply and demand. "2 Professor Hadley, in his 
recent book, is content to say that " the market- 
price of an article under the modern commercial 
system is the price at which the demand is equal 
to the supply." 

Now such a statement is doubly unsatisfactory. 
It neither defines a market-price nor explains how 
a market-price is actually reached. It furnishes 
no real answer to the question of the celebrated 
Oxford Professor who was reported to stop his 
friends in the street in order to ask them why a 
silk hat cost 20s. The text-book answer to this 
question consists in showing that the price of a 
silk hat cannot be 21s., because in that case sup- 
ply would be in excess of demand, there would be 
too many hats and too few people to buy them, 
and the competition of sellers would reduce prices; 
conversely, the price could not be 19s., therefore 
20s. is presented as a point of convergence be- 
tween two opposing prices which reach at that 

1 Cf. Dissertations and Discussions, Vol. IV (" Thornton "). 
^Principles (2d ed., p. 392). 



10 THE ECONOMICS OF DISTRIBUTION. 

point a temporary equilibrium. The supply of 
hats was equal to the demand at 20s. 

This statement that a market-price is one that 
equalises supply and demand explains nothing. 
What we want to know is why this equilibrium 
occurs at 20s. English economists have com- 
monly shirked the direct significance of this ques- 
tion, which requires an investigation of the actual 
process of equilibration in a market, and have 
either betaken themselves to an examination of 
the costs or utilities which lie behind demand 
and supply, or to the logomachy regarding the 
meaning of these terms themselves. It is indeed 
too true that some economists have so used the 
terms "demand " and " supply " as to beg the ques- 
tion of an equilibration. "We desire," says 
Cairnes, " to know the circumstances which deter- 
mine price; and we are told that the selling price 
is always such that the quantity of a commodity 
purchased in a given market is equal to the quan- 
tity sold in that market." ^ 

1 Leading Principles, p. 113. Cairnes, however, is wrong in 
imputing this fault of reasoning to J. S. Mill, though the latter, 
in the passages in which he expressly defines demand, is ill- 
advised in his language. In the formal definition (Bk. Ill, 
Ch, II, par. 3) he identifies demand with " quantity demanded." 
Unfortunately the expression might mean "quantity bought," 
or it might mean " quantity which buyers would be willing and 
able to buy at a given price." In a second passage (Bk. Ill, 
Ch. XVIII, par. 2) demand is held to mean "the quantity of 
it (commodities) which can find a purchaser," an expression 
involved in the same ambiguity, for it might be held that only 



DETEBMINATION OF A MARKET-PRICE. 11 

Where demand is equivalent to quantity de- 
manded in the sense of quantity bought, and sup- 
ply to quantity supplied or sold, it is evident that 
the boasted Law of Supply and Demand becomes 
nothing else than an identical proposition. 

But while Cairnes was right in insisting upon 
the need of an exact explanation of the process by 
which supply and demand are equilibrated in a 
price, he was himself unable to throw any further 
light upon the process than to suggest that the 
final result depended upon "higgling of the 
market." 

§ 5. The closest formal inquiry into the opera- 
tion of two-sided competition in a market is that 
of Bohm-Bawerk. I propose here to take his 
illustration of the market and to present his rea- 
soning in what I think is a simpler form than that 
found in his book. 

A, B, C, D, E, F, G, H, are sellers of horses. 
All the horses are supposed to be of the same 
worth, and all the sellers to have an equal know- 
ledge of the market. They have, however, mini- 
mum or reserve prices, which vary from XIO in 
the case of A, to c£26 in the case of H. 

the quantity actually sold " can find a purchaser," or it might 
include whatever quantity could be sold at a price, assuming it 
to be offered at that price. Mill's context and general treat- 
ment of a market-price, however, makes it pretty clear that he 
did not mean by " quantity demanded " quantity actually sold, 
but quantity which buyers were willing to buy if they can find 
sellers willing and able to sell at a price. 



12 



THE ECONOMICS OF DISTRIBUTION, 



I, J, K, L, M, N, O, P, Q, R, are buyers in the 
market, with maximum prices which vary from 
X15 in the case of I to <£30 in the case of R. 



Sellers. Price-limits. 

HGFEDOB A 



30 



26 



25 



211 



20 



17 



15 



11 



28 



26 



22 



.21. 



20 



17 



18 



15 



10 



IJKLMNOPQE 

Buyers. Price-limits. 

Let bidding open at ^10. At this point only 1 
will sell ; 10 would buy, and since none will let 
the other have a bargain, they will overbid. At 
Xll there are 2 sellers, but the competition of 10 
buyers will not allow a sale at that point, and bids 
still rise ; at ^15 there are 3 sellers, but the other 
7 will not allow 3 of their number to buy horses 
at X15, that sum being less than they would 
consent to give. At ^15 10s. one of the buyers 
has dropped out, his limit-price having been ex- 



DETERMINATION OF A MARKET-PRICE. 13 

ceeded, but there are still 9 buyers against 3 sell- 
ers ; these 3 sellers could not fix a bargain with 3 
of the buyers because, as they were settling it, the 
other 6 buyers, finding that they would be left 
in the cold, would offer better terms and upset 
the proposed bargains. At ^17 10s. another 
seller enters in, and another buyer has dropped 
out, but there are still 8 buyers against 4 sellers, 
and no bargain can be struck. After c£20 is 
passed, another seller will have entered, and an- 
other buyer have fallen out, leaving 5 sellers faced 
by 6 buyers. This state continues up to £21. A 
sale cannot take place, because the would-be ex- 
cluded buyer, the odd man, will fasten on to any 
of the 5 possible sales and force up the price. If 
c£21 is passed, however, this inconvenient odd man 
drops out, leaving 5 sellers and 5 buyers. Each 
man can make his bargain at <£21 Is., for 5 are 
willing to sell, 5 to buy, at that price. But 
though 5 would sell at .£21 Is., they would rather 
get more if they can ; they can get more, for all 
5 buyers would sooner pay up to £22 than fail to 
buy a horse. But if the sellers put up the price 
above £21 10s., a 6th seller would enter the field, 
and there would be 6 willing sellers against 5 will- 
ing buyers — a state of things which would force 
the price down below £21 10s. 

So whereas at any point just over £21 10s. 
there would be 6 sellers and 5 buyers, at any point 
just under £21 there would be 6 buyers and 5 



14 THE ECONOMICS OF DISTRIBUTION. 

sellers. In neither of these conditions is a price 
possible. On the other hand, at any point between 
£21 10s. and £21 there are 5 sellers and 5 buy- 
ers, and 5 sales can be made satisfactory to each 
party. In other words, supply and demand are 
equalised between X21 10s. and £21. 

Competition of buyers on the one hand and 
sellers on the other hand has thus fixed rigid 
limits for a market-price. 

But to fix limits for a price is not to fix a price, 
and curiously enough Bohm-Bawerk leaves his 
analysis at this interesting point. The bargain is 
made possible at any point between the valuation 
of the most capable of the excluded buyers, M, 
as lower margin, and the most capable of the 
excluded sellers, F, as upper margin ; but there is 
nothing in this analysis to show where it will lie 
between these margins. Indeed, we may say that 
if this were the whole process, no price could be 
fixed at all and no sale would be possible, at any 
rate by economic settlement. The unerring logic 
of competing self-interest which has found the 
price-limits will not find the price-point between 
those limits. The competition which was so effec- 
tive when 6 sellers faced 5 buyers, or 5 buyers 
6 sellers, seems to collapse when 5 buyers face 
5 sellers, and there is no odd man to throw his 
weight on to an impending bargain. As far as 
Bohm-Bawerk's analysis is carried, there is no 
more reason for the market-price being fixed at 



DETEBMINATION OF A MARKET-PRICE. 15 

one point between the limits rather than at any 
other point. Indeed, we appear to be landed in 
the same serious logical difficulty which encoun- 
tered us before. The 5 sellers would like to get 
a price as near as possible to £21 10s., the 5 
buyers a price as near as possible to £21: here 
we have a real discrepancy of interest between 
the parties and no machinery of competition to 
settle it. 

We must plainly recognise that if the sellers 
and the buyers in this case were really acquainted, 
not merely with the outward condition of the 
market but with the subjective valuations which 
each of them puts upon the act of sale, no sale 
could be possible by economic means. If the 
sellers can fix the price near the upper margin, 
the advantage of one of the buyers is reduced to 
a minimum, and the whole body of sellers get the 
best of the bargain ; if the buyers can force the 
price to near the lower margin, one seller has his 
advantage reduced to a minimum, and the buyers 
get the best of the bargain. Why should either 
party give way ? There is no economic method 
of reaching a price-point here ; it would be neces- 
sary either to agree to split the difference or to 
"toss-up," neither of which can be reckoned an 
economic settlement. This, we may take it, is 
not what would really happen, for the subjective 
valuations of the various buyers and sellers will 
not be known to one another. Although, in his 



16 THE ECONOMICS OF DISTRIBUTION. 

elaborate analysis of two-sided competition, Bohm- 
Bawerk does not even indicate how the price- 
point is reached, he has hinted in an earlier 
treatment of " one-sided competition " which ex- 
hibits the same difficulty that the price-point will 
depend upon "skilful bargaining." ^ In other 
words, the work of competition is not to find a 
price, and there is no such thing as a " competi- 
tion price " : competition stakes off a ring, within 
which bargainers fight it out by force and craft. 
Taking our present instance, it seems essential to 
the fixing of a price that one of the bargainers 
should deceive the other as to the real facts of 
the case (i.e. as to his subjective valuation), lead- 
ing the other to suppose that he will not give way 
any further. For instance, one of the sellers will 
conceal the fact that he would be willing to sell at 
^21, and will hold out for J 21 9s.; one of the 
buyers believing him, and fearing to be left out 
in the cold, will show his willingness to accept ; 
thus the bargaining at any price below £21 9s. 
will once more partake of competition, since only 
4 sellers face 5 buyers, and the equation of buyers 
and sellers is thus falsely placed at £21 9s. By 
such fraud or force of superior bargaining the 
price-limits are drawn together so closely as to 
approximate toward a money-point, and the "stand- 
ing out" of one of the 5 sellers may fix the 
price for all 5 sales at £21 9s. Some such 
1 Positive Theory of Capital, p. 200. 



DETERMINATION OF A MAREET-PEICE. 17 

practice of fraud or force seems necessary to 
achieve a price-point. 

Now, turning to those who have taken part in 
the process of determining a market-price, we 
can assign a different part to several groups. 

(a) First come the ineffectual buyers and 
sellers whose limits have been too high and too 
low for them to take part in an actual sale. In 
this group fall G and H among sellers, I, J, K, and 
L among buyers. The desires and actions of these 
persons have had no influence whatever on the 
market or the price ; their absence would not 
have caused any difference. 

(5) Next come the effectual buyers and sellers, 
whose subjective limits lie above and below the 
limits within which a price-point is fixed, and 
who, though they take part in the bidding of the 
market, have no direct influence upon the price. 
These are A, B, C, D, among sellers, O, P, Q, R, 
among buyers. 

(c) Thirdly come those members of the market 
whose subjective valuation fixes the possible limits 
within which 5 sellers would be willing to sell and 
5 buyers to buy. Bohm-Bawerk holds that this 
group should comprise E and F among sellers, M 
and N among buyers, for he holds that the action 
of these two pairs fixes the upper and lower limits. 
" The upper limit is constituted by the valuation 
of the last buyer who actually exchanges (the 
last buyer) and that of the most capable seller 



18 THE ECONOMICS OF DISTRIBUTION. 

excluded (the first excluded seller), and the 
lower limit by the valuation of the least capable 
seller who actually effects a sale (the last seller) 
and that of the most capable buyer excluded (the 
first excluded buyer)." So we get, he says, the 
very simple formula, " The market-price is limited 
and determined by the subjective valuation of the 
two marginal pairs." ^ 

According to this, the upper limit is fixed by 
the valuation of F, the first excluded seller, and 
N, the last actual buyer : the lower limit by the 
valuations of M, the first excluded buyer, and E, 
the last actual seller. But N's exact valuation, 
.£22, neither fixes nor helps to fix the upper limit, 
for if his valuation, instead of X22, had been 
<£21 lis., it would have made no difference. 
Similarly, E's valuation at £20 does not help to 
fix the lower limit, for if, instead of being X20, 
it had been <£20 19s., it would have made no 
difference. 

It seems therefore that the valuation of N and 
E had no direct influence upon the limits which 
are determined directly and exclusively by the 
valuations of M and F. 

(c?) Lastly, within the price-limits we have the 
action of one of the effective competitors in assum- 
ing the attitude which draws the price to a point. 
There is, of course, nothing to inform us which one 
adopts this attitude. We will assume that it is 

1 Z.c, p. 209. 



DETERMINATION OF A MARKET-PRICE. 19 

E, the last actual seller, whose limit-price is <£20, 
and who perhaps may be considered the stiffest 
bargainer and the most likely to hold out for a 
price just below <£21 10s., which after all will 
give him a less subjective gain than will fall to 
any of the other sellers whose limit valuation is 
lower. Or else we may suppose that N, whose 
subjective gain is smallest among the buyers, 
makes the successful stand, and, cajoling the sell- 
ers into thinking he will not buy at a price much 
over X21, fixes the price just above that point. 

§ 6. Our analysis, if correct, yields information 
upon two important matters : first, as to the 
method of determining a price or exchange-rate 
in a market ; second, as to the distribution of 
gain arising from a series of bargains at a market- 
price. 

As to the method of determining a price, it 
proves (a) that competition does not fix a price, 
but only the approaches to a price ; (5) that 
within the limits a price-point is fixed by the 
superior bargaining power of a single buyer or 
seller. 

As to the distribution of advantage arising from 
the series of sales at a market-price^ that is seen 
to depend, first, on the superior force or cunning 
(bargaining power) of one of the buyers or 
sellers ; second, on the differential valuation of 
the several buyers and sellers as measured from 
this price-point. 



20 THE ECONOMICS OF BISTBIBUTION. 

According to the conditions of this market, a 
far larger aggregate gain is obtained by the sellers, 
because the market-price, whether fixed near £21 
or near £21 10s., widely exceeds the supposed 
limits of several sellers. At c£21 price, the 
aggregate gain of the buyers stands at <£25, 
whereas the gain of sellers stands at .£32. If 
X21 10«. is the price, the buyers' gain falls to 
£22 10s., and the sellers' rises to £34 10s. 

No provision evidently exists, in the process of 
determining a price, for an equal or " fair " divi- 
sion of the advantage of exchange. In no case 
where a sale takes place at the market-price will 
the advantage to the two parties effecting the sale 
be equal. In every sale there must be some ad- 
vantage to both parties, but it will not be equal. 
If the price stands at just under £21 10s., N, the 
last effective buyer, will gain just over 10s. ; while 
E, the last effective seller, will gain a little less 
than £1 10s. Whatever be the actual arrange- 
ment which couples the respective buyers and 
sellers making the 5 sales, no one of these 5 sales 
will give an equal gain to the two parties, though 
to both parties in each case there must be some 
gain. 

§ 7. The net result of the investigation is to show 
that the gain which accrues to buyers and sellers 
in a market consists of two elements. First 
there is the difference between the higher and the 
lower limit of price, representing, in the case taken 



DETERMINATION OF A MABKET-PBICE. 21 

above, nearly ^1 in each transaction. This is 
distributed according to the force or skill of the 
strongest among the buyers or sellers. It is not 
easy to decide how this gain may be most conven- 
iently described. Regarded from the standpoint 
of origin it ranks as a " forced gain " ; in so far 
as it denotes an advantage common to the whole 
body of buyers or sellers in the market, as distinct 
from the particular gains which accrue from dif- 
ferences of individual valuation, it may be spoken 
of as a "specific gain." It will be necessary to 
use both these terms in describing it. 

The sellers and buyers, whose valuations lie 
beyond the limits within which the price is fixed, 
take in addition to the portion of this specific 
gain which may or may not fall to them, a differ- 
ential gain which represents the difference between 
their individual valuation and the upper or the 
lower limit, according as they are buyer and seller. 

For instance, on the assumption that the market- 
price was fixed at <£21 9s., A would obtain a gain 
of 9s., representing the "forced" or "specific" 
element as measured from the lower limit of X21, 
and a gain of <£!!, I'epresenting the difference 
between <£10, the least sum at which he would 
have sold, and j621, the lowest price which ordi- 
nary competition rendered possible. 

Economic literature has, of course, made us very 
familiar with the idea of differential gains, classed 
commonly as producers' and consumers' rents, but 



22 THE ECONOMICS OF DISTRIBUTION. 

the existence and nature of the other element, 
viz. forced gain, which clearly emerges from the 
analysis of market-price, has not received the 
attention it deserves. 

It may be said to represent the failure of com- 
petition, alike in theory and in practice, to fix a 
price. If the competition between buyers and 
sellers were able to determine a price-point, the 
weakest buyer and seller would alike gain a 
minimum advantage from the sale, and there 
might be said to be a tendency toward an equal 
distribution of the differential gains of the bargain 
for the other parties. But the fair field of com- 
petition is seen to be incapable of reaching a 
market-price, and gives way in the last resort to 
that same arbiter of fraud or force that is seen to 
fix a price when a single buyer is bargaining with 
a single seller. 

§ 8. In other words, if the example taken above 
is a sound one, force is the ultimate determinant 
of a market-price. 

But is the example sound ? 

Proceeding along our sliding-scale of instances 
from a primitive bargain, have we yet reached the 
true conditions of a modern market, and is the 
market-price really determined in the manner 
above described ? 

It is evident that the example does not corre- 
spond to any actual or possible horse-market. 
It assumes that 8 horse-dealers are each offering 



DETEBMINATION OF A MARKET-PBICE. 23 

for sale a horse which they all believe, and which 
all of the prospective buyers believe, to be of ex- 
actly equal quality, and that, this being so, the 
dealers yet differ so widely in their limit-price 
that while one is only willing to sell at X26, an- 
other will sell a horse he knows to be of equal 
worth at so low a sum as <£10. An actual horse- 
market will offer a supply of horses, no two of 
which are estimated at the same worth by buyers 
or by sellers, and there will not be any close agree- 
ment as to that worth by any two of those taking 
part in the market ; neither will the actual condi- 
tions of bargaining be such that each knows what 
offers the others are making, unless the sale is of 
the nature of an auction, which really removes the 
case from a two-sided competition and places it 
among the one-sided competitions. 

An actual horse-market, in which the several 
buyers and sellers bargained with one another, 
would not in fact result in the attainment of an 
exact market-price for a given quality of horse ; 
the prices actually paid not merely would fail to 
distribute equally the subjective gains of the bar- 
gains, but there would not be the objective equal- 
ity afforded by our theoretic instance of equal 
money prices for equal "value." The individual 
craft of bargaining, the acts of concealment and 
of bluff, would, in fact, play a larger part than in 
our case. Taking the aggregate gains of a series 
of bargains in such a market, the differential ele- 



24 THE ECONOMICS OF DISTRIBUTION, 

ment would be much smaller than in the theoretic 
case, and the " forced gain " much larger. 

Bohm-Bawerk makes his differential gains de- 
pendent upon subjective valuations. In the case 
of horse-markets this is specious, at any rate, so 
far as buyers are concerned. But in ordinary 
trade markets, where the buyers buy to sell again, 
an objective basis of differential gains must exist. 
A can only value the same goods at 20% more 
than B, because he enjoys some trading or manu- 
facturing advantage (objective) which enables 
him to put what he has bought to a larger pro- 
ductive use. 

But these practical considerations do not appear 
to me to invalidate the general correctness or to 
destroy the serviceable results of the analysis. 
Our example has legitimately excluded minor con- 
flicting circumstances ; all the material facts have 
been set in a clearer atmosphere, which enables us 
rightly to detect the real nature of the bargaining 
process. 

§ 9. But there is one circumstance in the se- 
lected example which it is important to discuss. 
A horse-dealer must sell a whole horse at a time, 
and the buyer cannot buy less than a whole horse. 
In other words, the separate units of supply are 
dumped down into the market within distinct and 
fairly wide intervals of valuation between the sev- 
eral units. The last horse that is sold differs from 
the first horse that is not sold by a definite consid- 



BETEBMINATION OF A MARKET-PRICE. 25 

erable sum, no less than 30s. Now if, instead of 8 
horses valued at different intervals between ,£10 
and c£26, we had an infinite number of horses, it 
will be admitted that the competition (which I 
fear, however, would take an eternal time to com- 
pass) would bring the upper and the lower limit 
to a meeting-point (i.e. the interval between them 
would be infinitely small). ^ In that case the mar- 
ginal pair would make their bargain upon equal 
terms without any element of " forced gain " enter- 
ing the market-price. 

Now this supposition that in a finite market 
there may be, not 8 or 80, but practically an infi- 
nite number of units of supply, valued at extremely 
minute intervals of difference, is not a pure work of 
the imagination, but is approximated to in certain 
markets. There is no possible interval between 1 
horse and 2 horses in a supply of horses, but there is 
an indefinite number of possible intervals between 
1 pound and 2 pounds of gold in a supply of gold. 
In the case of goods which are infinitely divisible, 
we might regard the supply in a market at any 
given time as consisting of an infinite number of 

1 Jevons, in his Theory of Political Economy (Ch. IV), 
plainly enforces the truth that the theory of competition, as 
determinant of price-point, rests upon the supposition of in- 
finite divisibility of supply (cf. p. 108). In fact, the whole 
mathematical treatment rests upon the same supposition, and 
the fact that supply is not, in any case, infinitely divisible, 
impairs the practical service of the whole mathematical treat- 
ment. 



26 THE ECONOMICS OF DISTRIBUTION. 

units whose valuation in the minds of the sellers 
grades down by imperceptible intervals from the 
highest to the lowest limit-price. Such goods are 
gold or corn or cotton. 

The importance of this is that, by taking our 
example of a market from such classes of goods, 
we seem to reach a market-price by pure competi- 
tion of buyers and sellers. Look, for instance, at 
the local corn-market which Marshall uses to illus- 
trate the determination of a market-price. Here 
we have a number of farmers, each (say) with 100 
quarters of wheat to sell, and a number of corn- 
factors, who are buyers in this market. At a 
price of 36s. all the farmers would be willing to 
sell all their stock, but few, if any, buyers could 
be found at such a price : if 35s. was a possible 
price, most farmers would sell all they had ; but a 
few would hold back part of their wheat, thinking 
to sell at a future market for 36s. Each lower 
price would, of course, reduce the effective supply 
and increase the effective demand ; the price actu- 
ally reached, say 27s., secures the so-called equilib- 
rium of supply and demand, i.e. sellers are willing 
to sell (say) two-thirds of their wheat at 27s., and 
buyers will buy that same amount at 27s. 

Now such a market differs in two respects from 
our horse-market. First, as to the units of supply 
and demand. In a horse-market less than 1 
horse cannot be bought or sold ; 1 horse is thus 
a minimum unit of supply ; a dealer with 10 



DETERMINATION OF A MAEKET-PEICE. 27 

horses cannot offer to supply more than 10 alter- 
native quantities. But a farmer with 100 quarters 
of wheat is owner of a much more elastic and divis- 
ible supply; though for purposes of rough reckon- 
ing he may divide his stock by tens of quarters and 
reckon it worth his while to sell 100 at 36s., 90 
at 34s., and so on, there is nothing to prevent him 
calculating more minutely ; in theory, at any rate, 
he would be willing to sell 79 quarters at a slightly 
lower rate than he would take for 80, in a rising 
market. At any rate, it is easy to see that there 
is a far greater elasticity in supply and in demand 
in a corn-market than in a horse-market, a far 
greater variety of possible prices with a f:ir nar- 
rower interval between them. This signifies a far 
closer and more effective competition between 
buyers on the one hand and sellers on the other, 
the result being that the limits between which 
ordinary competition breaks down are much nar- 
rower. 

The second point of difference is even more 
important. It consists in the fact that a local corn- 
market is in far closer touch with a wide world- 
market than is the local horse-market. Where 
commodities are in wide and general demand, 
valuable in proportion to their bulk and weight, 
so durable that they can be carried far without 
risk or waste, they are the subjects of a world- 
market. This means that wherever they are sold 
^the price attained at any day in any local market 



28 THE ECONOMICS OF DISTBIBUTION. 

is not determined wholly or chiefly by the present 
local supply and demand, but by the general sup- 
ply and demand the world over. Not merely the 
1000 quarters owned by the sellers, or the c£1500 
or so of purchasing power owned by the buyers, 
compete and find an equilibrium : both sellers 
and buyers are also influenced, in the quantity 
they offer or buy at the several prices, by the 
quotations from the wider market upon which the 
total, not merely of existing but of prospective, 
supply and demand of wheat is operating. 

So in a local corn-market the possible limits of 
competition are circumscribed by conditions im- 
posed from the national market, or those great 
centres where national economic forces are most 
fully operative ; while the national market is in 
its turn kept within tolerably small limits of 
fluctuation by the international market which 
takes close account both of the present and the 
probable future stock of wheat and the demands 
for the same. 

§ 10. Every local market, even for highly perish- 
able and cheap bulky commodities, is of course to 
some extent affected by wider market-areas, and to 
some extent by the general supply and demand 
of similar commodities. But, in respect of many 
commodities, this outside contact is so slight and 
slow that prices are chiefly the resultant of local 
forces of suppl}^ and demand. Common bricks 
or plums, for instance, will have a large number 



DETERMINATION OF A MARKET-PRICE. 29 

of little market-areas, the prices of which may- 
vary widely. In the small local markets sellers 
of bricks or plums have little power of withhold- 
ing their supply or disposing of their goods else- 
where, while buyers are similarly restricted in 
their demand : hence the pressure of local or 
temporary circumstances, favouring either buyers 
or sellers, will play a larger part in determining 
a market-price, genuine competition will tend to 
break down at any earlier point, and force or 
superiority in bargaining-power will be a more 
important factor. On the other hand, in the 
market for gold, or even for cotton, wool, or 
wheat, under normal conditions, buyers and sell- 
ers in a local market are less under pressure to sell 
here and now, to buy here and now : the whole 
world-supply, present and prospective, is taking 
part in the competition as it affects each local 
market, and the local market-price reflects the 
greater delicacy and complexity of the world- 
market. What this signifies is that in commodi- 
ties belonging to a world-market, free competition 
may be said to determine the price, because the 
number of actually or potentially competing units 
is so numerous that little scope remains for that 
force or craft of special bargaining which plays 
a considerable part in the small local market. 

In fact, where the local market is in such close 
and constant organic relation to the world-market, 
the price attained in any part tends to be not 



30 THE ECONOMICS OF DISTRIBUTION. 

merely a market-price, but a normal price, that is 
to say, a price which will average the economic 
conditions of supply and demand over the whole 
present market, and, by discounting probable 
changes in future supply and demand, will simi- 
larly average the series of temporal prices. 

For instance, in the market for gold or for lead- 
ing securities of any kind, if the competition of 
buyers and sellers worked freely and were not 
constantly checked and falsified by the manipula- 
tion of rings of speculators, market-prices would 
tend to become average or short normal prices. 
The same is true of all goods for which there is a 
world-market. The competition here is between a 
vast number of competing buyers and sellers, whose 
units of supply and demand represent an indefinitely 
large variety of different equilibriums : under such 
circumstances competition would do its work so 
well that any local group of buyers and sellers 
would find there remained very little for the 
higgling of the market to achieve. 

§ 11. When we have one of these wide highly 
organised markets, maintaining a genuine compe- 
tition between very large numbers of buyers and 
sellers dealing with large quantities of divisible 
goods, the competition of buyers and sellers brings 
the price-limits so near together as to appear to 
establish a price-point. In theory, the case of the 
horse-market still applies, and a bargain under 
conditions of duress fixes the price-point here as 



BETEBMINATION OF A MARKET-PBICE. 31 

elsewhere; but the influence is so slight that it 
may be practically ignored. 

Moreover, in the cotton or the wheat market 
not only is this element virtually eliminated, but 
the differential gains of various buyers and 
sellers are reduced to much smaller dimensions 
than in the local horse-market. The markets 
which are in this highly organised state are gen- 
erally those in which buyers and sellers are among 
themselves fairly on a level : sellers are producing 
under such equality of conditions that the supply 
sold at a given price yields a fairly equal profit to 
the different sellers ; while buyers, as in the cotton 
or corn market, are buying not for use, but to sell 
again in some form or other under conditions 
which tend to equalise the subjective gains made 
on their bargains. The different buyers and 
sellers of raw cotton at Liverpool, at a given price, 
may be held to have made a subjective gain which 
will not differ widely in different cases, unless 
where the seller acts under some special pressure 
of financial circumstances. 

§ 12. Whenever a market contains a consider- 
able number of buyers and sellers, fairly equal 
in economic resources and in knowledge of com- 
modities ; where sellers obtain their supply under 
fairly equal conditions of trade or manufacture , 
where buyers are buying to sell again, not to con- 
sume ; where the articles bought and sold belong 
to a Avide market, are minutely divisible in quan- 



32 THE ECONOMICS OF BISTBIBUTION . 

tity and durable in nature, — these conditions 
may be held practically to eliminate force from 
a market-price and to make it the result of com- 
petition alone. 

But these conditions are notoriously absent in 
the great majority of cases. Take a rapid sur- 
vey of the whole range of bargaining, examining 
the various classes of goods as they exchange 
hands in the different processes of production ; in 
how many cases are the above-named conditions 
present ? 

Take, first, the great extractive industries; con- 
sider the bargains made by farmers, miners, fish- 
ermen, etc., with the merchants who buy their 
produce or the railways that carry it; the con- 
stant attempts of shippers, importers, and produce- 
exchange speculators to corner supply and to 
operate in prices ; the advantages which supe- 
rior sources of supply, patents or secret methods 
of production, combinations to restrict output or 
regulate prices have in most organised manufac- 
tures ; the oscillation of local corners and cut- 
throat competition in most branches of retail 
trade, — these and similar causes render the con- 
ditions of free and fluid competition inoperative 
over the vast majority of the processes in the sale 
of goods. Again, if we turn to the bargains for 
the sale or hire of land, the conditions are notori- 
ously absent. When we investigate the condi- 
tions under which bargains for the use of capital 



BETEEMINATION OF A MABKET-PRICE. 33 

take place, we shall perceive how narrow are the 
limits of the free field of investment where bor- 
rowers and lenders meet on equal terms. As to 
that huge class of bargains which take place at 
every spot in the industrial field for the sale of 
labour-power, in hardly any cases can we find the 
conditions of equal bargaining present, even where 
professional skill or other highly placed labour- 
power is the object of sale. Outside the ordinary 
range of industry, in cases where bargaining is 
between author and publisher, between mistress 
and domestic servant, between teacher and parent, 
hotel-keeper and guest, the competition is so slight 
and indirect, the knowledge of the two parties so 
imperfect, that an equal bargain is never struck 
except by chance. 

It appears then that but a very small propor- 
tion of bargains can be referred to an open-faced, 
two-sided competition in a market where outside 
prices are so directly operative as to equalise the 
gain for the individuals who take part as buyers 
or sellers in the market. 

§ 13. This brief investigation of the economic 
conditions of a market-price warrants the follow- 
ing conclusions : — 

(1) Every economic buyer and seller in a mar- 
ket (i.e. every one guided by self-interest who 
knows what he is doing) makes some gain from 
his bargain. The notion supported by thinkers of 
such diverse character as Bacon and Ruskin, that 



34 THE ECONOMICS OF DISTRIBUTION. 

in a trading bargain " what one man gains another 
loses," receives no warrant from our analysis. It 
must, however, be admitted that in every series of 
bargains at a market-price, one of the buyers or 
sellers will make his bargain on such terms as will 
secure to him a bare minimum gain. 

(2) There is nothing in the economic nature of 
a Market to secure equality of gain for any two 
bargainers. 

(3) The amount of gain which comes to each 
will depend on three conditions : (i) the superior 
strength or skill of one final bargainer ; (ii) the 
ability of competition between buyers and sellers 
to fix the limits within which this strength or skill 
may operate ; (iii) the difference between the re- 
serve-price of each buyer and seller and the actual 
price attained. 

(4) Where the market-area is of wide space 
and time, differential estimates and power of bar- 
gaining will be of relatively small importance ; 
where the market-area is narrow, they will be of 
relatively large importance. 

APPENDIX TO CHAPTEE I. 

The Relative Strength of Buyer and Seller. 

The analysis of the process of bargaining shows that 
sometimes the buyers, sometimes the sellers, are in 
the stronger position and are able to " get the better " 



APPENDIX TO CHAPTEB I. 35 

of the bargain. No law of direct and general applica- 
tion assigning this superiority of bargaining power is 
discernible, but certain conditions are found to attach 
to specific markets, which evidently make in favour 
of one or other of the two parties. Setting aside for 
separate and fuller treatment the markets for the sale 
of the use of land, capital, and labour, and confining 
ourselves here to markets of commodities, we find the 
relative strength of buyers or sellers often associated 
directly with (a) the greater or less urgency of the 
need to buy or sell, (b) the greater or less strength or 
skill in the art of bargaining. 

Where the buyer does not buy for personal consump- 
tion, he is generally held to have an advantage in the 
process of bargain or exchange, partly because' he is 
the holder of money — the least specialised com- 
modity — pitted against the holder of some specialised 
commodity, partly because the urgency of a trade- 
use is less than the urgency of a personal need. But 
where the buyer is a direct consumer, this advantage 
is often more than offset by the present pressure of 
personal needs which obliges him to buy now from some 
one who is not obliged to sell now. So, for example, 
the venders of refreshments or books in a railway 
station enjoy a distinct advantage in bargaining. 
The general rule, however, assigns superiority to the 
ownership of money, which for many commercial 
purposes is more desirable than a nominally equiva- 
lent value in specialised wares. It seems strange 
that the advantage of the extra stability of value and 
exchangeability attached to money should not be 
fully discounted in actual prices; but it is found in 



36 THE ECONOMICS OF JDISTBIBUTIOJST. 

practice that any owner of goods for sale who names 
their ^' value ^' " would rather have the money." If, 
however, the consumer who cannot delay consumption 
is liable to the disadvantage attending a forced pur- 
chase, the producer under modern commercial condi- 
tions is often subject to the inconvenience of a " forced 
sale," either because his expenses of production are 
incurred on credit (i.e. he needs money to pay for 
raw material bought with bills, to pay interest on 
borrowed capital or mortgage, or to pay wages or 
other current business expenses), or else because the 
goods he has to sell spoil or lose value by being kept. 
A striking example of a class of producers subject 
to the conjoined force of these disadvantages is the 
agriculturist, but all sellers of quickly perishable 
goods are liable to this handicap. 

If the owners of money be held to have an advan- 
tage as compared with owners of goods for sale, the 
sellers of raw materials which are needed for many 
different industrial uses, and of other less specialised 
commodities, will seem to have an advantage in sell- 
ing to various groups of buyers who, because they 
belong to different trades, will not act closely together. 
The seller of timber, wool, or iron (other things equal) 
seems to hold a stronger position than the buyer. It 
is, however, possibly incorrect to attribute the greater 
desirability of holding money over holding goods to 
the general command over commodities attaching to 
the latter. Eor if there were a ready and perfectly 
reliable demand for goods, their possessors, though 
one step further removed from the ownership of any 
other class of commodities than the possessors of 



APPENDIX TO CHAPTER I. 37 

money, would have a compensation for this remote- 
ness by owning something of more direct service in 
consumption. If the owner of corn or wool or leather 
could rely upon the speedy sale of his goods at a 
calculable price, his command over commodities in 
general would not really be weaker than that of the 
owner of money, but only a little slower in its opera- 
tion. In that case the buyer who offered money 
could not be deemed to be to any appreciable extent 
the stronger bargainer. It is therefore the uncertainty 
of finding a purchaser at a calculable price which 
must be accounted the weakness of the seller as com- 
pared with the buyer. This weakness is plainly 
enhanced by certain tendencies of machine-produc- 
tion and machine-transport, which seem to keep many 
markets in a constant or a frequently recurring condi- 
tion of congestion : the eagerness of sellers to find pur- 
chasers is attested both by the extraordinary energy 
in pushing and advertising goods and by the cutting 
of the marginal profits upon each sale to a minimum. 
The wide prevalence of these conditions is irrefutable 
proof of an admitted weakness in bargaining on the 
part of owners of goods as compared with owners 
of money.^ This superiority, perhaps normal over a 

1 It is curious that Mr. and Mrs. Webb, who, in the chapter 
on "The Higgling of the Market" of their Industrial Democ- 
racy, emphasise and illustrate so powerfully the superior posi- 
tion of the buyer "at each link in the chain of bargaining," 
fail to perceive that no other " economic " explanation of this fact 
is possible than that a general excess of producing power exists 
beyond what is required to supply the current demands of con- 
sumers. If it is a fact that " at each link in the chain of bar- 
gainings the superiority in ' freedom ' is so overwhelmingly on 



38 THE ECONOMICS OF BISTEIBUTION. 

large field of industry, may be modified by the nature 
of the money-offer of buyers. Where credit is freely 
given, the buyer loses part of his advantage as owner 
of money — a fact which may be otherwise expressed 
by saying that a buyer will bid higher when he need 
not pay ready money. 

The mode of bargaining or the conditions under 
which bargains are made have much to do with the 
success of buying and selling. It may be broadly 
stated that makers are at a disadvantage in bargain- 
ing with traders, in so far as the art of bargaining 
forms a larger part of the trader's activity, so that he 
must be deemed more highly specialised in dealing. 
Where the productive processes are conducted under 
conditions which remove the producers from wide com- 
mercial training, and especially where, as in farming, 
they are not themselves large buyers of raw material, 
etc., the merchants or dealers who buy their produce 
have a clear advantage. Purchasers of retail goods are 
in this respect at a disadvantage in comparison with the 
sellers. They are less effective bargainers in so much 
as they must be regarded as amateurs bargaining 
with specialists for any particular class of goods they 
require for consumption. Again, the conditions under 
which the retail market is commonly conducted tend 

the side of the buyer that the seller feels only constraint ; " if 
" it is highly significant that it is always the seller who bribes, 
never the buyer" (Vol. II, p. 676), this can only signify a con- 
stant tendency for the effective supply of markets to exceed the 
effective demand, only another way of stating the fact of an 
excess of producing power. It is significant that Mr. and Mrs. 
Webb have no economic explanation to offer of the curious 
phenomenon they note. 



APPENDIX TO CHAPTER I. 39 

to secure this advantage to the retailer. As Cairnes 
points out : " In the wholesale market the sellers and 
purchasers meet together in the same place, affording 
thus to each other reciprocally the opportunity of 
comparing directly and at once the terms on which 
they are severally disposed to trade. In retail deal- 
ing it is otherwise. In each place of sale there is but 
one seller ; and though it is possible to compare his 
terms with the prices demanded elsewhere by others, 
this cannot always be done on the moment, and may 
involve much inconvenience and delay.'^ (" Leading 
Principles,'' p. 112.) 

One of the peculiar advantages of the large over 
the small business in manufacture is that the scale 
upon which the large business is conducted enables 
it to employ skilled specialists in buying and in 
selling. 

These are differences in the economic strength or the 
skill of bargaining. One further point bearing upon 
the process of bargaining deserves mention, viz. the 
relative disadvantage of the party who names a price. 
In retail shops the habit of ticketing goods, of using 
price-lists, or even of naming a price upon request, 
gives to the buyer a certain advantage, the nature of 
which is apparent from our analysis of the horse- 
market. The bargainer who at the outset names a 
price gives some indication of his subjective valua- 
tion ; the buyer might be willing, if necessary, to pay 
a higher price than that named, if both parties were 
equally ignorant of the estimate they set respectively 
upon the bargain. In open bargaining it is a clearly 
recognised point of skill to get the other party to 



40 THE ECONOMICS OF DISTEIBUTIOJSf. 

name a price, even though, that price has little or 
no chance of being satisfactory to both parties. 

Finally, it must be remembered that, where the 
conditions of a perfect market exist, in the sense that 
all buyers have the same valuation and all sellers 
likewise, while the knowledge of the arts of bargain- 
ing and other special advantages are equally divided, 
the issue is determined by numbers. In such a case 
one side (that with the shorter number of competitors) 
will get the full gain of the bargain, the price being 
determined at or close to the higher or the lower limit. 
A reference to the case of the horse-market set forth 
in the text will make this evident. Change the con- 
ditions of this market so as to present 10 willing 
sellers at a minimum price of £20 a horse and 9 
willing buyers who would consent, if necessary, to pay 
£21, the price will be at or just above £20, because 
the tenth seller, afraid of failing to effect a sale, will, 
by competition, beat down the price to that point. 
This consideration means that under existing indus- 
trial conditions, where there are generally more will- 
ing sellers at a price than willing buyers, the latter 
enjoy a normal advantage. 



CHAPTER II. 

PRODUCER'S AND CONSUMER'S RENTS. 

§ 1. Before proceeding further with the analy- 
sis of market-price and the element of forced gain 
contained in it, it is desirable to clear some mis- 
apprehension which attaches to the differential 
gains which play so prominent a part in the analy- 
sis. Differential rents have received much atten- 
tion from economists in their investigation of the 
relations of producers and consumers. Now these 
producer's and consumer's rents, as they are called, 
have been a source of grave misapprehension, by 
reason of the mode of measuring them, which has 
been generally adopted. The nature of this error 
will be best understood by examining concrete 
examples. 

Take the instance of the passengers who pur- 
chase tickets for 32s. Sd. to go from London to 
Edinburgh by a particular train. Here we have 
a number of buyers who pay the same price for 
their tickets, but who, presumably, will differ 
widely in the importance which they assign to the 
purchase of a ticket. A is reluctantly leaving 
business at an awkward time in order to visit his 

41 



42 THE ECONOMICS OF DISTBIBUTIOJSf. 

relatives, and we may assume that if the price of 
a ticket were any higher than 32s. 8c?., he would 
refuse to go. He ranks as the marginal buyer, 
whose differential gain or rent is nil. Turning to 
the other extreme we find B, who will make a 
business profit of XIOOO if he can put in an ap- 
pearance at Edinburgh within a certain number of 
hours. B would pay for a ticket any sum short of 
the whole difference between 32s. Sd. and £1000, 
if he had no option. His differential gain, there- 
fore, appears to stand at (say) .£998. This is the 
common mode of measuring producer's and con- 
sumer's rents. Yet it is plainly fallacious. For 
B's supposed gain of £998 upon his transaction 
with the railway is derived truly, not from that 
transaction, but from a certain business advantage 
he obtains in a business bargain in Edinburgh. 
This sum will evidently appear as a differential 
or a specific gain in the market to which the lat- 
ter transaction belongs, and if the purchase of a 
ticket to Edinburgh stands as a separate action, the 
same gain will be counted twice. This is clearly 
inadmissible. The fallacy consists in a false inde- 
pendence assigned to the purchase of the ticket. 
This purchase is in reality one of a number of 
acts complementary, or, in this case, subsidiary, to 
the business transaction from which the gain 
of £998 emerges. In order to reach Edinburgh 
in time, he may be obliged to send a telegraph, to 
take a cab, and to make sundry other small out- 



PEOBUCEB'S AND CONSUMER'S BENTS, 43 

lays; each of these may be a necessary means to 
his end, in which case, according to the accepted 
mode of estimating differential gains, the <£998 
will be counted over again many times. Evi- 
dently this method of detaching each transaction 
is illicit. A number of related actions must be 
taken to form an organic group, and the true dif- 
ferential gain will be the net differential gain 
upon the group. The business custom which 
would reckon the price of the ticket and other 
incidental outlays as expenses, to be deducted 
from the gain of the transaction toward which 
they were contributory means, is clearly the logi- 
cal mode of procedure. Where expenses may be 
incurred, partly on their own account, because 
they contribute some direct satisfaction to the 
spender, and partly as a means to secure some 
ulterior gain, it may be difficult or even impossi- 
ble to make a true assignment of differential gains. 
A business man's expenditure during a given time 
may not easily break up into separate groups cen- 
tring round some distinct business " deal " ; even 
where a large number of transactions are clearly 
recognised as incidental, the main deals, from 
which the " gains " directly proceed, may be 
closely connected or mutually dependent. 

But, however difficult it may be in practice to find 
the true group-unity in a number of dealings, the- 
ory requires that we reckon differential gains upon 
the group, and not upon a falsely isolated item. 



44 THE ECONOMICS OF DISTBIBUTION. 

The fallaciousness of the separatist treatment 
is still more glaring when we take the common 
instance of the differential gain attributed to the 
purchaser of some necessary of life. Each time 
a man buys his necessary supply of food or cloth- 
ing, he can appear to make a differential gain 
measured by the difference between the price he 
pays and the price he would be willing and able 
to pay if he were compelled to do so. " All that 
a man hath will he give for his life," so that the 
difference between the price actually paid and the 
total possessions of the purchaser will rank as 
differential gain on each occasion when a necessary 
is bought. 

§ 2. These reflections seem to require impor- 
tant modifications to be made in the treatment of 
producer's and consumer's rents. The common 
presentation of consumer's rents assigns to the 
consumer a rent upon that portion of his income 
spent as necessaries, which is infinitely great 
when measured in utility, and which, when meas- 
ured in money, is equal to the whole of the re- 
mainder of his income which he would have con- 
sented to add to the price actually paid for neces- 
saries, had he been compelled to do so. So, if we 
suppose a case of a man spending an income of 
.£400 a year, the first <£100 going for necessaries, 
the second for conveniences, the third for com- 
forts, the fourth for luxuries (taking the conven- 
ient distinction usually made), the consumer's 



pboduceb's and consumer's rents. 45 

rent obtained on the outlay of the first £100 
would be X300, upon the second £200, and 
upon the third £100, while the last can yield no 
consumer's rent, for he had no reserve out of 
which he could have paid a higher price for the 
luxuries he bought. Such analysis yields a con- 
sumer's rent of £600 out of a total expenditure 
of £400. Taking a nicer discrimination in the 
relative subjective valuations of different portions 
of each group of goods, we should, of course, obtain 
a more complex measurement (all luxuries, for 
instance, except the least valued, yielding some 
rent) ; but the rough estimate will serve to illus- 
trate our point, which is this : If the man be sup- 
posed, at any given time when he is making a 
purchase, to have at his command his whole in- 
come of £400, on each separate occasion when he 
buys a weekly store of necessaries he will appear 
to make a consumer's rent, measured by the dif- 
ference between what he pays and £400, and the 
net rent during the year will depend upon the 
number of times he buys necessaries. The same 
will hold of his other non-necessary purchases. 
Or again, if this man has £100 saved in the bank, 
this £100 will rank as rent every time he makes 
a purchase of necessaries, for he would and could 
pay it in addition to the price he actually pays, 
rather than go without a necessary. This also 
will hold of his other purchases, of conven- 
iences, etc., for he would consent to pay a por- 



46 THE ECONOMICS OF DISTRIBUTION. 

tion at least of his saved XlOO rather than fail 
to get them. 

It is evident from this that the assignment of a 
consumer's rent upon a particular purchase is il- 
licit. A consumer's rent can be rightly reckoned 
only by considering the totality of purchases over 
a given period and the totality of the current in- 
come during such period. When, therefore, Pro- 
fessor Marshall says,^ "The excess of the price 
which he would be willing to pay rather than go 
without it, over that which he actually does pay, 
is the economic measure of this surplus pleasure, 
and may be called consumer's rent," his defini- 
tion is doubly fallacious. In the first place, the 
mere willingness to pay cannot be a source of con- 
sumer's rent, nor indeed does Professor Marshall 
intend that it shall be so understood. The will- 
ingness to pay must be backed by the power to 
pay. But this power to pay, as we have shown, 
cannot be rightly reckoned upon the single pur- 
chase. In order to measure it, we need to take a 
related group of purchases, and if we are dealing 
with rent derived from the expenditure of an in- 
come supposed to cover a period of time, the 
group must consist of the whole number of pur- 
chases within that time.^ 

1 Principles, Bk. Ill, Ch. VI, § 1. 

2 Professor Nicholson {Principles of Political Economy^ 
Vol. I, p. 58) effectively discloses the illusory nature of the 
attempt to measure total utility by price. 



produceb's and consumer's rents. 47 

§ 3. It may, indeed, be questioned whether this 
mode of reckoning, thus logically forced upon us, 
does not invalidate the utility of consumer's rent 
altogether. For if we suppose that («) either the 
whole of the year's purchases are made at a single 
time with the whole of the year's income, or that 
(5) each piece of income as soon as it is received 
is laid out in a purchase, it will appear that no 
consumer's rent emerges, either upon the total- 
ity of purchases in the one case (a), or upon any 
individual purchase in the other case (5) ; for in 
neither case is there any residue of money in the 
hands of the purchaser which he could and would 
have paid rather than fail to get what he buys. 
If I spend my income literally as fast as I receive 
it, no consumer's rent emerges. It is only the 
spare cash in my purse after I have made a pur- 
chase, all or part of which constitutes consumer's 
rent : if my income were doled out to me for each 
specific purchase, though my income over a period 
of time were just as large, no consumer's rent 
could appear. 

One qualification to this conclusion seems to be 
required. If I do not spend, but save, a portion 
of my income, that saving rightly appears as 
consumer's rent, even when the totality of pur- 
chases is set against the total income ; for I would 
have sacrificed the whole of this saving rather 
than have dispensed with a necessary, and some of 
it rather than go without a convenience. 



48 THE ECONOMICS OF BISTBIBUTION. 

I suggest, therefore, that savings may be the 
only legitimate consumer's rent, when we take 
an organically related group of purchases meas- 
ured over a period of time and compare them 
with the income received during that time. 

It may, indeed, be arguable that the term " con- 
sumer's rent " should continue to be applied to 
the X300 which our man would have consented to 
spend upon necessaries, had he been obliged to do 
so ; but there seems little advantage in this appli- 
cation of the term. Our first rude reckoning of 
consumer's rent upon the supposition that the 
first XI 00 of an income of c£400 was spent on 
necessaries, the second £100 on conveniences, 
the third on comforts, and the fourth on luxuries 
would, we found, yield a total rent of <£600, — 
£300 on the first, £200 on the second, and £100 
on the third division. But this reckoning must 
also be discarded, for it is evidently just as il- 
logical to make an artificial severance of expen- 
diture into four groups, and to treat the whole 
income as if available for each group, as it woul^ 
be to take the whole £400 into account whenever 
a single purchase of a necessary or a convenience 
was taking place. 

If it is still held convenient to retain the cate- 
gory of consumer's rent, it must be understood 
that, in the instance we have taken, the total con- 
sumer's rent on purchases during the year will 
only amount to the £300 spent on other things 



PROBUCEB' S AND CONSUMElCs BENTS. 49 

than necessaries. Thus conceived, consumer's 
rent will be measured, not on the individual 
transaction, but upon total expenditure over a 
period of time, and will be equivalent to that 
portion of the income which is either spent on 
other things than necessaries, or is saved. ^ 

§ 4. Now let us turn to producer's rent. The 
excess of price actually obtained over the price 
which the seller would have consented to take 
forms producer's rent. Differential advantages 
for production may be said to be the origin of 
these rents in competitive trade. Let us suppose 
that among cycles competing for sale at <£18, the 
most expensively produced cost .£15 to make, 
while some others — made by makers enjoying 
superior economies of production — may be pro- 
duced at <£12 ; in this case £3 ranks as producer's 

1 This conclusion may be illustrated by a more detailed 
examination of the illustration of consumer's rent Marshall 
takes (Bk, III, Ch. VI). He takes the case of a man who 
buys 7 tons of coal at £1 per ton. This man would have paid 
£10 rather than fail to get one ton, £7 rather than fail to get 
a second ton, £5 for a third ton, £3 for a fourth, £2 for a 
fifth, 30s. for a sixth. Since he only pays £1 for each ton, his 
consumer's rent on the 7 tons amounts to £22^. Now, though 
none of this cost can rank as a "necessary" (for in that case , 
he would have been willing to pay the whole £7 + £22|^ for the 
first ton), it ranks as a prime convenience of life. When, there- 
fore, we say that this man would have willingly paid £22^ 
more in order to get the coal, we mean that he would have 
sacrificed the other comforts or luxuries upon which he has 
already spent £22 J (or the £22 J savings, if he has saved it). 
But if, instead of coal, we took bread or any necessary, it is 



50 THE ECONOMICS OF DISTBIBUTION. 

rent. At first sight this rent seems to be calcu- 
lable upon a single act of sale, but it is not really 
so. For this maker can produce at ,£12 not the 
particular cycle which is sold for ^18, but this 
cycle in conjunction with a large number of 
others. It is only produceable at £12 as one 
unit in a large output. Thus the consumer's 
rent of £3 is based upon an assumption involv- 
ing a large number of other sales. JExpenses 
of production cannot be taken as any definite 
amount in reference to a single sale, just as util- 
ity of consumption reckoned in money cannot be 
taken as a definite amount in reference to the pur- 
chase of a single consumable. 

The true basis of calculation for producer's 
rent will be the total output of a particular busi- 
ness over a period of time, as in the case of the 

easy to see that this same £22J, plus all the part of his income 
spent on conveniences, comforts, and luxuries, will figure as 
consumer's rent upon the purchase of bread. Let him have 
an income of £1000 a year, £40 of which is spent on necessary 
food, the rest of the £960 will appear as consumer's rent upon 
purchases of food, for he would have paid it all rather than fail 
to get the food. This same sum, or part of it, cannot rightly 
he reckoned over again as more consumer's rent upon coal 
and other commodities which the consumer appears to value 
at a higher price than he gives. 

The total consumer's rent cannot exceed £960, and would, 
in fact, appear to correspond to that portion of his income spent 
upon non-necessaries, including any savings he might make. 

Marshall's mode of reckoning would enable the same money 
income to count over and over again, as often as a purchase 
was made. 



pbobuceb's and consumer's bents. 51 

consumer's expenditure of income. So the net 
profit on a given business over a month or a 
year may be legitimately taken as the basis of 
measurement for a producer's rent. 

The term "net profit" is proverbially ambiguous. 
The producer's rent, however, may be taken to 
be any excess of profit that may accrue in a busi- 
ness during a given period over and above the 
minimum profit required to induce the continued 
application of industrial power. This excessive 
profit doubtless emerges in each act of sale; but 
it cannot be rightly calculated on the separate 
sales, since the expenses of production of one 
article are organically related to those of other 
articles. The true producer's rent thus repre- 
sents the money value of a differential economy 
of production, as compared with the economy of 
the least effective producer competing in the 
market, and is estimated upon the total business 
over a period of time. The true consumer's rent 
represents a differential economy of consumption, 
expressed in the money value of that portion of 
consumption and saving which takes place during 
a given period, over and above the necessary mar- 
gin of subsistence. Thus we place the two rents 
in line with one another : the producer's rent 
measured from a marginal expense of production 
(i.e. the smallest sum necessary to recoup the costs 
of production of the portion of supply produced 
under the least favourable circumstances) ; the 



62 THE ECONOMICS OF DISTBIBUTIOJST. 

consumer's rent measured from a marginal ex- 
pense of consumption (the smallest sum neces- 
sary to maintain the consumer's life under the 
least favourable circumstances). 

§ 5, Consumer's rent is sometimes stated in 
direct relation to reductions of price of a com- 
modity. For instance, a fall in the marginal 
expenses of producing cotton goods represented 
in a fall of prices is described as yielding a con- 
sumer's rent. This treatment, however, involves 
an assumption of the stability of money income of 
consumers which is not legitimate. It may be that 
a fall in price of commodities is also an economic 
cause of a fall of income to a class of consumers ; 
in that case the fall of price does not yield to mem- 
bers of this class a true consumer's rent, for the 
margin for purchases outside of necessaries is not 
increased. Though it may be true that a fall of 
money prices does commonly increase the purchas- 
ing power of consumers and so raise their con- 
sumer's rent, the fixity of money income is not 
rightly assumed in a community where incomes 
are ultimately paid out of the prices received for 
sale of commodities. 

§ 6. This consideration of producer's and con- 
sumer's rents shows a tendency on the part of 
differential rents of buyers and sellers in a mar- 
ket to assume an exaggerated size by reason of an 
assumption of independence and isolation of a 
small local or temporal group of transactions. 



producer's and consumer's rents. 53 

The criticism of consumer's rent may at first 
sight appear inapplicable to the differential gains 
of buyers who buy not for "consumption" or 
direct personal enjoyment, but in order to sell 
again or to use as a means of production. But 
when buyers are manufacturers who buy raw 
materials of manufacture, or are retailers, their 
differential gains may either be accounted anal- 
ogous to consumer's rents, — consumers' utility 
being imputed to the various production-goods 
which are required in the different stages of 
production, in accordance with the analysis of 
Wieser and the Austrian School, — or they may 
be taken as a source of future producer's rents 
in the manufactory or the retail business to which 
the buyer devotes the goods he buys. The latter 
is perhaps the more convenient mode of reckoning. 
Where the buyers are manufacturers purchasing 
their materials of manufacture, any differential 
gain they make will be represented by a differen- 
tial gain which the lower expense of production 
in their business will enable them to obtain from 
the sale of the manufactured goods into which 
these materials shall pass. 

Since the residual element of forced or specific 
gain in a market-price is dependent on and 
measured from the differential valuations of the 
limiting buyer and seller, the character of quan- 
titative exactitude imputed to it in the illustra- 
tion of a market, borrowed from Bohm-Bawerk, 



54 THE ECONOMICS OF DISTRIBUTION. 

will be subject to a similar process of qualifi- 
cation. 

In fine, the group of transactions taken to con- 
stitute a market at a given place and time has had 
ascribed to it an independence which is unreal, 
with the result that a false definiteness appears in 
the gains which the different parties are assumed 
to make from their transaction. 

But the recognition of this truth does not im- 
pair the fundamental validity of the analysis of a 
market. The two elements of differential and 
specific gain which this analysis discovered in the 
market are really there, though the actual condi- 
tions of a market prevent them from being subject 
to the precise measurement ascribed to them in 
our falsely isolated instance. 



v^^' 



CHAPTER III. 

THE DETERMINATION OF LONG-PERIOD PRICES 
AND OF VALUE. 

Part I. 

§ 1. It has appeared that the process by which 
a market-price is reached makes no provision for 
the equal distribution of the advantage of a bar- 
gain in the case of any of the pairs which effect a 
sale in the market. It is equally clear that the 
amount of gain which accrues to each party re- 
spectively in a number of bargains at a market- 
price will be determined by certain forces which 
lie outside and beyond the machinery of compe- 
tition and bargaining in the market, and which 
assign to the body of buyers and the body of sell- 
ers the economic power which is represented in 
the actual gain each gets from the transaction. 

If, putting the matter in general terms, we say 
that the relation of supply to demand determines 
the market-price, we are driven for further ex- 
planation to examine the forces which give power 
to supply and to demand. 

First, a word further as to normal price. It is 
sometimes suggested that though a market-price 

65 



56 THE ECONOMICS OF DISTRIBUTION. 

may, by virtue of passing or local circumstances, 
lean in favour either of buyers or sellers, there 
exists something called a normal price, round 
which market-prices oscillate, which averages the 
fluctuations of market-prices over a period of 
time, and which in the long run divides equally 
the advantage among buyers and sellers. Now 
this term "normal price " has its uses. But it must 
be kept in mind that a normal price is nothing 
but an average of market-prices, itself varying 
according to the number of different market- 
prices it averages. The notion, therefore, that in 
a normal price the inequality of competing or 
bargaining power between buyers and sellers will 
be eliminated, and that the normal price repre- 
sents absolutely free competition, is utterly chi- 
merical. The identification of the normal or aver- 
age price with what theoretic economists some- 
times still call a natural price, whereby exchanges 
take place with absolute reference to cost of pro- 
duction or some other standard of value, has no 
validity. For we have no reason to assume that 
a normal price, which represents market-prices of 
wheat or horses over a period of a year or two 
years, is a price which, if it were constant through 
that period, would divide equally among buyers 
and sellers the total gain of the transactions. If 
the advantage which one party may possess in a 
market were simply due to chance (to some sud- 
den or unaccountable facts), and there were an 



LONG-PEBIOD PBICES AND VALUE. 57 

equal probability of this chance favouring one 
side or the other, on that supposition an average 
or- normal price would be one which eliminated 
the advantage in a market. But how, if the su- 
periority of competition belongs to one side or the 
other, not merely in a single market-price, but 
over the whole series; if one side ha's an advan- 
tage on the average ? Evidently the normal 
price will not eliminate, but will reflect that ad- 
vantage, and a normal price will in no sense be a 
natural, or a " free competition," price. If one of 
the two sets of bargainers enjoys a constant ad- 
vantage in the power to manipulate a profit by 
passing circumstances, or a power resting on some 
superior source of supply, it follows that a nor- 
mal price which merely averages actual market- 
prices will include an element of inequality. 
Average the dealings of small money lenders with 
their clients over a term of years; you obtain a 
normal price of such loans, but that price reflects 
a normal advantage possessed by such money lend- 
ers. For certain purposes, theorists are doubt- 
less at liberty to ignore these normal advantages 
and to consider industry under a condition of ab- 
solutely free competition of capital and labour. 
But much intellectual harm has resulted from 
economists leaving the consideration of an actual 
market-price, and hastening to the consideration 
of a normal price, which in one breath they re- 
gard as an average, in another as a "natural," 



58 THE ECONOMICS OF DISTRIBUTION. 

price expressing the relation of commodities under 
purely ideal conditions. 

§ 2. The laws of distribution which underlie 
the bargain are best studied as they govern the 
forces operating in the market. Some of those 
very factors, which it is believed a normal price 
eliminates, are essential to the study. 

Let us, then, return to our market-price. We 
have seen how it is actually determined in the 
market, given certain buyers and sellers with 
their valuations ; but we want further to know 
what outside economic forces determine such and 
such buyers and sellers to enter the market and 
bargain at such valuations. 

Now these deeper economic forces, which govern 
market-prices, are best examined as they are oper- 
ative in a change of price. 

What is the cause of a price-change ? The 
question sounds a simple one, and economists 
generally agree in the terms of their answer. A 
price-change is directly motived by a shift in the 
.quantitative relation between supply and demand 
at the previous price. But what is here suggested 
by supply and demand ? The supply which 
thus operates in price-change evidently does not 
mean the total stock of goods in existence, but the 
q uantity which sellers are willing and able to sell 
at the former price. Similarly with demand. If 
we are to place it in true relation with this supply, 
demand must mean either the quantity of goods 



LONG-PEBIOD P BICES AND VALUE. 59 

which buyers are willing and able to buy at the 
former price, or the quantity of money buyers are 
able and willing to pay for goods at the former 
price. If, however, taking these meanings of the 
terms, we turn to the mechanism of the market, 
we find them defective in that they furnish 
a merely statical setting to a dynamic problem. 
Supply and demand thus conceived are stationary 
amounts. Now, price-change is a process, and in 
order to understand this process, what we have to 
estimate is the rate at which the stock of goods is 
increased and depleted — a flow and not a fund. 
But, if we conceive supply and demand as quan- 
tities of goods (or money) regarded at a particu- 
lar time, we conceive them as funds. In order 
to study price-change properly, we must express 
supply and demand as flows, i.e. measure them 
as processes taking place in time. Consistently 
with this purpose, supply may mean the total stock 
offered for sale at a price during any given time, 
and demand may mean quantity of purchases at 
a price within a given time, or quantity of money 
expended at a price within a given time. But it 
will be more convenient to define the terms more 
narrowly, confining supply to the rate of increase 
of stock; demand to the rate of withdrawal from 
stock (or the rate of payment of money in with- 
drawing from stock). Thus alone do we rightly 
come to regard supply and demand as processes 
or " flows," and the supply and demand with 



4 

60 , THE ECONOMICS OF DISTRIBUTION, 

which we concern ourselves will be equivalent 
to the rate of production and of consumption. ^ 
Where goods flow out of a stock at the same pace 
as they flow in, the price remains firm, and de- 
mand and supply will be said to be equilibrated ; 
where the inflow is faster than the outflow, prices 
fall, and supply will be said to exceed demand ; 
where the outflow is faster, prices rise and de- 
mand exceeds supply. This setting regards de- 
mand primarily as a rate of outflow of goods. 
But if we regard demand as a power exercised by 
the purchaser, it signifies and is measured by an 
inflow of money. The quantitative relation of 
supply and demand may be expressed in either 
measure of demand. But in dealing with the 
mechanism of exchange, it is best to regard 
demand as an action proceeding from the buyer 
and to measure it in the terms of purchasing 
power. 

Any increase or decrease of money, expended 
upon goods at a given price within a given time, 
implies a corresponding increase or decrease in 
quantity of goods bought, so that no error will 
arise from substituting the money-measure for the 
goods-measure of demand, and regarding it as an 

1 The term " consumption " is here used in the loose business 
sense, in which, for instance, it is said, cotton-yarn or iron is 
consumed when it is utilised in manufacturing processes. In 
strict statements of economic theory, it is desirable to confine 
consumption to the use of retail goods by so-called consumers. 



LONG-PERIOD PRICES AND VALUE. 61 

inflow of money from the purchaser instead of an 
outflow of goods from the seller. 

Keeping clearly in mind this conception of 
supply and demand as a rate of flow, it is hardly 
possible to misstate the law of price-change. 

So long as a body of sellers in a market, main- 
taining the same stock of goods, can sell those 
goods at the same pace at which they have sold 
them hitherto, they will not lower and cannot 
raise the price. If they lower the price, this act 
means either a fall off in the pace at which buyers 
ask for goods, or it means that they have increased 
their stock, and in order to make sales correspond 
with this increased rate of supply, they must 
stimulate demand by lowering prices ; if they 
raise their price, it means either a reduction of 
supply in face of a constant or an increasing 
demand, or it means a growth of the rate at 
which purchases are made from a constant or 
decreasing supply. 

Thus there are two immediate causes of a rise 
of price, — viz. a relative decrease of supply or 
a relative increase of demand ; two causes of a 
fall of a price, — a relative increase of supply or 
a relative decrease of demand. 

§ 3. This somewhat pedantic formulation of the 
law of price-change is rendered necessary by the 
fact that in working out special problems, economic 
thinkers not infrequently ignore the law and 
adduce distant forces as causes of a change of 



62 THE ECONOMICS OF DISTRIBUTION. 

price, without showing how they operate in alter- 
ing the quantitative relation between the flow of 
supply and of demand. I might illustrate from 
every page of the elaborate controversies upon 
money. Generations of economists have argued 
the influence of quantity of gold or of money 
upon prices, without recognising that they are 
under any obligation to show how an increase or 
a decrease of money will affect the rate of supply 
or the rate of demand for commodities : this final 
link required to connect quantity of money with 
price-change is almost always either jumped or 
ignored, the real issue being begged in some more 
or less ingenious manner. Persons who so confi- 
dently affirm that an increased quantity of gold or 
other money would of necessity raise price, are 
required to show that this increase of money 
necessarily means an increased rate of purchase 
of commodities, or a decrease in the supply of 
commodities ; this they seldom or never attempt 
to do. 

Of course there are numerous forces (and mone- 
tary ones among them) which can be rightly spoken 
of as causing changes of price, but they all act 
through, and can be tested by, their influence upon 
rate of demand or supply. 

§ 4. Turning then to our issue, price-change, 
we see sellers and buyers as repositories of supply 
and demand. 

Whatever force proceeding from either side dis- 



LONG-PERIOD PRICES AND VALUE. 63 

turbs the existing balance of supply and demand 
affects price. It also affects value. Nearly the 
whole of the trouble about value has arisen from 
separating unduly the consideration of value from 
that of price. Once keep clearly in mind the 
fundamental truth that price is value expressed 
in terms of money, it will then appear that the 
most profitable way of studying the nature of 
value is to study the forces which cause price- 
change. The notion that value is some inherent 
and abiding property of wealth, which escapes at 
any rate the minor fluctuations of market-changes, 
has no validity whatever. ^ 

Once expel from the mind the idea that value 

1 Still more fallacious is the signification which so hard- 
headed a thinker as Professor Hadley adopts, identifying value 
with " a proper and legitimate price as distinct from an unfair 
and illegitimate one." 

"The price of an article or service," he says, "in the ordi- 
nary commercial sense, is the amount of money which is paid, 
asked, or offered for it. The value of an article or service is 
the amount of money which may properly be paid, asked, or 
offered for it." — Hadley 's Economics, p. 92. 

Now this involves a double-barrelled error. First, whatever 
value is, it is not "an amount of money," though it may be 
measured by an amount of money. Secondly, the idea that it 
is a "proper " or "legitimate " price involves, as indeed Hadley 
admits, a reference to some ethical standard which he does not 
attempt to establish. There is no justification whatever for 
assigning to value (exchange -value) any more permanency 
than attaches to price. The value of any stock of goods (the 
quantity of other goods they will exchange for) will vary with 
everything that affects the market-price. 



64 THE ECONOMICS OF BI8TBIBUTI0N. 

is an inherent quality or enjoys any more perma- 
nency than does market-price, and it becomes 
evident that the study of price-change is the 
surest approach to the true understanding of 
value. ^ 

§ 5. The one-sided theorists who have made 
value dependent either solely upon " cost " of 
production or upon "utility," commit a similar 
error. Though they formally describe value as 
a relation between commodities, they realise it as 
a property attaching to commodities. Those who 
attribute to cost of production the cause or deter- 
mination of value, realise goods as possessing value 
in the shape of the productive power of labour and 
capital which has been used in making them, and 
are thus driven to deny the direct influence on 
value of causes which do not operate through 
cost of production. The Utility School similarly 
comes to regard and speak of value as a property 
or force stored in goods, by reason either of the 
direct satisfaction they can afford, or because of 
their contribution toward the production of goods 
which give a certain quantity of satisfaction, only 
admitting causes from the cost side in so far as 
they are seen to operate upon utility. 

Considered in a broad, historical light, the two 
opposed theories of value are of great interest. 

1 Bohm-Bawerk, who insists on distinguishing value and 
price as conceptions, admits that " the laws of these two 
coincide." {Positive Theory of Capital, "p. 132.) 



LONG-PEEIOB PRICES AND VALUE. 65 

Economics, after it left the liberal hands of Adam 
Smith, was moulded into the structure of a sci- 
ence of commerce by the classical economists with 
Ricardo at their head. The characteristic note of 
this school was to regard the production of com- 
mercial wealth as the end or final cause of industry: 
to this intent they twisted the whole terminology 
of political economy. Consumption itself was 
justified as a means to an end — the furtherance 
of production. 1 Not merely was the theory of 
Consumption or Human Satisfaction left wholly 
undeveloped by this school, but it was equally 
germane to their conception of the science to 
ignore utility and to consider cost of production 
as the cause of value. This is essentially the com- 
mercial point of view. The commercial man has 
no direct concern with the utility of his goods — 
that is the purchaser's lookout (^caveat emptor!) ; 
his chief business is to look after the cost of pro- 
duction and the sale. The treatment of labour as 
a mere commodity — one " cost " of production — 
belongs to the same attitude. On the other hand, 
Jevons and his fellow- thinkers in England, Austria, 
and America assign utility as cause or determi- 
nant of value, because they have abandoned the 
commercial standard and substituted a " human " 
standard. Economic activities are regarded as 

1 The free trade theory did, indeed, formally recognise the 
supremacy of the interests of the consumer, but it never affected 
the main structure or the terminology of political economy. 



66 THE ECONOMICS OF DISTRIBUTION. 

contributing, not to "business," but to satisfac- 
tion: the end is no longer production, but con- 
sumption. So, just as it was natural for the 
commercial economist to look upon " costs " as 
a force generated in various processes of produc- 
tion, accumulating and vested in goods as making 
them " valuable," so it was natural for those who 
look down the line of industrial processes from the 
other end, from consumption, to take the con- 
sumer's test of the valuable — utility — to refer 
it back as a property potentially existing in differ- 
ent classes of commercial goods which are on 
their way to blossom into really useful goods 
when they reach the consumer. 

Stand at one end of the stream of industry, you 
see goods gathering cost as they pass from process 
to process in production, and then cost appears 
to be the value which is growing : stand at the 
other end, value seems only to emerge from the 
contributions which productive processes make 
toward the supply of consumables, and to con- 
sist of nothing else than this utility of consum- 
ables reflected back upon the earlier processes — a 
potentiality of satisfaction. 

Now both these views of value are due to an 
almost materialistic conception of value as a 
property or force stored in material forms of 
wealth and transmitted from one end or other 
of the chain of industry. By an unwise depar- 
ture from the actual operations of the market, they 



LONG-PERIOD PRICES AND VALUE. 67 

have developed an abstraction as unreal as the 
"oddity and quiddity" of the mediaeval school- 
men. Like the latter, too, they have developed a 
dogmatism in the assumption of their theory, 
which would be ridiculous if it were not so in- 
jurious. Of course all holders of a "cost" theory 
of value admit that valuable things must be use- 
ful, but this utility is only a condition, while cost 
is the efficient cause : " utility " men allow that 
cost affects the value of all freely produced goods, 
but they maintain cost is the condition, utility the 
efficient cause. ^ 

§ 6. Now if, leaving abstractions, we turn to 
shifts of actual prices and recognise that with 

1 Admitting, as Bohm-Bawerk does, that " for the emergence 
of vahie there must be scarcity as well as utility, — not absolute 
scarcity, but scarcity relative to the demand for the particular 
class' of goods," — it is hard to understand why he should refuse 
to scarcity (and through scarcity to cost) an independent in- 
fluence as a direct determinant of value. He does not really 
dispose of this independent influence by making economic 
scarcity " relative to the demand "; for while change of demand 
may undoubtedly affect the "relative" scarcity, changes pro- 
duced by natural causes or human arts, stimulated by no change 
of demand, may also affect this relative scarcity. It is diiflcult 
to comprehend why a change in the value of a stock of wheat, 
due to a favourable season or a new railway, should be attrib- 
uted to demand, which has either not changed, or the change 
of which has been clearly consequent upon an enlargement of 
supply. Yet if "scarcity" thus affected may be legitimately 
regarded as a true determinant of change of value, why may 
not "scarcity" and the cost factor behind it rank as a true 
determinant of value ? (Positive Theory, Bk. Ill, Ch. II, 
p. 135.) 



68 THE ECONOMICS OF BISTBIBUTION. 

each price-change the value of a stock of goods 
is changing, we perceive that value is affected, 
and directly affected, by forces proceeding from 
either side, and that this distinction between 
causes and conditions of value has no ultimate 
validity. 

Only by turning to the actual play of economic 
forces in a market can we perceive the or- 
ganic relation between cost and utility operating 
through supply and demand, which is required 
to establish the truth that value is determined by 
the interaction of the tv/o. It is the most ser- 
viceable achievement of Professor Marshall to 
have clearly established the equality and the in- 
terdependence of cost and utility as the deter- 
minants of value. This he did by working out 
through supply curves and demand curves the 
laws of the regulation of prices. With the theory 
of value as distinct from that of prices he has 
dealt very briefly, but his brief treatment con- 
tains a refutation of the Jevonian theory of "final 
utility " as crushing as even Mr. Hyndman could 
desire. With characteristic academic modesty 
Professor Marshall has placed this criticism of 
Jevons in a small print note, the very title of 
which is but a slight indication of its matter. It 
is called a "Note on Ricardo's Theory of Value " ; 
but though it contains an exposure of the insuffi- 
ciency of the cost theory, its chief importance 
consists in its brief and absolutely conclusive ref- 



LONG-PEBIOB PRICES AND VALUE. 69 

utation of the syllogism into which Jevons some- 
what rashly cast his doctrine of value. The fact 
that many students of economics still speak of 
themselves as Jevonians in their interpretation 
of value, I can only explain by supposing that 
.Professor Marshall's note has escaped their atten- 
tion. As Professor Marshall points out, Jevons, 
with the ingenuousness of the professional logi- 
cian, provides his own refutation. His theory 
that the value of a supply of goods is determined 
by the final utility, i.e. the utility which attaches 
to the least serviceable portion of the supply which 
is already consumed, he sums up in the following 
syllogism ; — 

"Cost of production determines supply, 
Supply determines final degree of utility, 
Final degree of utility determines value." ^ 

Now, setting on one side the careless and inac- 
curate statement that cost of production deter- 
mines supply, whereas final cost is the immediate 
determinant, this syllogism, as Marshall points out, 
really gives away the most distinctive feature in 
Jevons's treatment. Jevons wishes to insist that 
final utility, not final cost, is the real controlling 
force. But his syllogism, though alleging that 
value is directly dependent on final utility, shows 
that final utility is controlled by final cost, so that 
the latter is made, after all, the master. 

1 Principles (2 ed.), Bk. IV, Ch. XV. 



70 THE ECONOMICS OF DISTRIBUTION. 

The whole statement, as Marshall shows, can 
be utterly upset by inverting Jevons's syllogism 
and substituting the following, which is " rather 
less untrue " : — 

" Utility determines the amount that has to be supplied, 
The amount that has to be supplied determines cost of 

production, 
Cost of production determines value." 

The fallacy of attributing the determination of 
value (or price) to final cost or to final utility is 
one and the same. Final utility cannot be the 
^ultimate determinant of value, because final utility 
will depend upon how much is bought, and how 
much is bought will depend upon the quantity 
that is offered at different prices, and this in its 
turn depends upon final cost. So, conversely, 
final cost cannot determine value, because the 
cost of producing the last portion of supply will 
depend largely upon how much is produced, and 
that will depend on the effective demand at dif- 
ferent prices, or, ultimately, on the final utility 
attending different quantities of consumption. 

Professor Marshall has summed up the matter 
with perfect accuracy by comparing the two in 
their action to the blades of a pair of scissors. 
" When one blade is held still, and the cutting is 
effected by moving the other, we may say with 
careless brevity that the cutting is done by the 
second ; but the statement is not one to be made 
formally and defended deliberately." 



LONG-PERIOD PRICES AND VALUE. 71 

The fact is, that both sides commonly imported 
a particular concept into value which begged the 
question. The commercial economist saw that 
goods fetched a high price because they were dif- 
ficult to get hold of (scarce) or "costly" to make ; 
the humane-minded economist found the common 
meaning of value more akin to utility. The same 
transaction is often regarded in common life 
by two parties with the same difference of view. 
Take the case of the cab-runner, who demands a 
shilling for carrying your box into the house. He 
values his action at a shilling, looking at it from 
the cost side ; he has run two miles against a horse, 
with the risk of being refused the job after doing 
all this work ; a shilling is not an outrageous 
charge for his effort and his risk. On the other 
hand, you would almost as soon as not take the 
exercise of carrying your own box up the steps, so 
the actual good you get from the cab-runner is 
very small indeed. Or, again, take the case of Mr. 
Beecham, who sells us pills which he perhaps 
correctly observes are " worth a guinea a box " to 
us, and yet, with a rare spirit of self-denial, con- 
sents to take Is. lOd.y regulating the price rather 
by consideration of the cost to him than the utility 
conferred on us. 

The confusion which has thus attached to value 
arises almost inevitably when a popular abstrac- 
tion is taken into scientific terminology. 

S 7. Another curious instance of the inveterate 



72 THE ECONOMICS OF DISTBIBUTION. 

one-sidedness of the adherents of final utility in 
recent times is furnished by the use which Bohm- 
Bawerk and others of his school have made of the 
term "subjective value " in seeking to identify it 
with the old use value. " It is important," writes 
Bohm-Bawerk,i "that we give right names to 
those things which tradition has handed down to 
us under the inadequate designation of use value 
and exchange value. The two groups of phe- 
nomena, to both of which popular usage has 
given the ambiguous name 'value,' we shall dis- 
tinguish as value in the subjective and value 
in the objective sense. Value in the subjective 
sense is the importance which a good, or a complex 
of goods, possesses with regard to the well-being 
of a subject." And this " well-being " he proceeds 
to identify with the " satisfaction of a want." Now 
by thus identifying subjective with use value he 
has begged a most important issue. I may put 
the matter in the form of a question and ask. Why 
should not the term " subjective value " be applied 
to the whole subjective or human facts which lie 
behind objective or exchange value — facts which 
relate not only to the utility of the good possess- 
ing the exchange value, but to its cost as well? 
The forces which directly operate in determining 
objective value proceed both from costs and from 
utility. Why, then, should the term " subjective 
value " reflect only the subjective aspects of those 
1 Positive Theory of Capital, Bk. Ill, Cli. I. 



LONG-PERIOD PBICES AND VALUE. 73 

which proceed from utility ? The " well-being of 
a subject" is just as much concerned with mini- 
mising costs as in maximising utility. Subjective 
value, if it is to have any proper or intelligible cor- 
respondence to objective value, should express 
the relation of subjective cost to subjective utility. 

It is perhaps not curious that Bohm-Bawerk 
should proceed to mate this error by giving also 
the same one-sided interpretation to objective 
value by which he says is meant " the power or 
capacity of a good to procure some one objective 
result. In this sense there are as many kinds of 
value as there are external results with which 
man may be connected. There is a nutritive 
value of food, a heating value of wood and coal, 
a fertilising value of manures, a blasting value of 
explosives, and so on." ^ Now there is, perhaps, 
no sufficient reason wh}^ Bohm-Bawerk should not 
apply the term " objective value " to these objec- 
tive utilities. But when he seeks to identify it, 
as he does in the paragraph just quoted, with 
exchange value, I can only say that he is depart- 
ing from the meaning consistently and universally 
accorded to that term by past economists. 

The fact is that in his preliminary process of 
defining objective and subjective value he has 
identified them with objective and subjective 
utility, denying the validity of all " cost " consid- 
erations. This, occurring as it does in the opening 

1 p. 131. 



74 THE ECONOMICS OF DISTBIBUTIOJSf. 

pages of a treatment of value, is sheer '•''petitio 
principii.^^ 

§ 8. But, though in the specific problem of direct 
determination of value final or marginal utility 
exercises no power, the like of which is not exer- 
cised by final or marginal cost, there is a sense in 
which a superior control may be claimed for utility 
as " causa causans.^^ Were " economics " expanded 
into a broader science, which should take cogni- 
zance of all forms of vital wealth, the economic 
antimony of production and consumption would be 
merged in the deeper unity to which biology and 
ethics testify, when they insist that work, or pro- 
duction, can be as genuine and vital a source of 
satisfaction as consumption itself. From such a 
standpoint Bohm-Bawerk's insistence, that the 
causal connection " runs in an unbroken chain 
from value and price of products to value and 
price of costs," appears defective, for we perceive 
"utility" or other vital satisfaction emerg- 
ing directly from processes of production in the 
finer arts and handicrafts. 

A really philosophical analysis from the physio- 
logical or the psychological standpoint would 
seem to bring together into such close organic 
relation the processes of productive and con- 
sumptive work and enjoyment, that neither in 
the purely biological nor in the conscious realms 
could they be severed or priority of importance 
accorded to one of them. 



LONG-PERIOD PBICES AND VALUE. 75 

But taking economics within the limits generally 
assigned to it, the Utility Schools are entitled to 
ignore these considerations, and to insist that the 
theory of value is not concerned with the ultimate 
rationale of function and fruition, effort and 
satisfaction, but only with such pains of produc- 
tion and pleasures of consumption as actually 
figure in present human estimates of value. So, 
any labour, which is itself a joy, and is recognised 
as such, involves no economic "cost," and such 
" goods " as it produced would, unless the labour 
were hampered by scarcity of material, possess 
no "value," but would be "free" goods. The 
utility theorist rightly urges that, since economic 
costs are ex-hypothesi " painful," they cannot 
be regarded as undergone for their own sake, but 
only as means to the end of attaining some utility. 
Thus the conscious motive force which directs 
the volume of productive force emanates from the 
demand of consumers, and utility of consump- 
tive goods becomes the ultimate cause why value 
attaches to any stock of productive goods. 

We may even affirm that from utility, through 
demand, proceed the very forces which direct and 
evoke costs, drawing industrial energy into the 
right channels and stimulating those very im- 
provements in organisation and the industrial 
arts which subsequently appear as chief causes of 
changes of value from the cost side. 

But though utility thus figures as the final cause 



76 THE ECONOMICS OF DISTRIBUTION. 

of value, it is not rightly taken as the sole efficient 
cause or as the sole determinant of quantity of value 
attaching to a stock of goods. The distinction 
here made is not a barren one. The economic 
problem of value is one in which we are rightly 
concerned, not with final, but with efficient, causes, 
and the mistake of the Utility School is that they 
substitute the former treatment for the latter. 
As a direct, independent, efficient cause of the 
value of a given stock of goods, cost ranks on a 
level with utility. The attribution of final cau- 
sality to utility has no serviceable bearing on the 
problem of determination of values and prices. 
Bohm-Bawerk sometimes seems to feel this, and is 
driven to claim for utility a superior power, not 
only as final, but as efficient, cause, insisting, for 
instance, that value "runs from iron goods to iron, 
and not conversely." Now the iron goods ap- 
pear to impose value upon iron and to determine 
the " how much " of the value, only so long as we 
ignore the influence of costs (through scarcity of 
supply) upon the iron goods. When, however, 
that influence is taken into consideration, the 
value of the supposed sole determinant is seen 
to be itself determined partly from the cost 
side. In other words, the flow of accumulating 
costs drawn from the iron and coal is perceived 
to be just as much an efficient cause of the value 
of the iron goods as the utility of the latter is of 
the value of the iron. So that even were we to 



LONG-PERIOD PBICES AND VALUE. 77 

admit that the value of iron was imputed from the 
value of the iron goods, cost is not banished as an 
efficient cause of the value of iron. The somewhat 
intricate and complex reasoning by which Bohm- 
Bawerk has sought to get rid of costs as direct and 
separate influences on value of productive goods, 
receives more detailed consideration in an appendix 
to this chapter. The breakdown of the attempt 
to repudiate the separate efficient causal influ- 
ences of " costs " in determining the value of con- 
sumptive goods and productive goods is there 
made manifest. 

§ 9. A brief summary of the actual relations 
which subsist between costs and utility and be- 
tween the value of productive and consumptive 
goods will take the following shape : — 

Taking industry as "a going concern," and 
bearing in mind the present condition of the in- 
dustrial arts in the several processes, we shall find 
that a definite quantitative relation exists between 
the amount of value of the productive goods and 
instruments at the several stages, and the amount 
of value of the consumptive goods which issue 
from them. If we consider, as we reasonably 
may, consumptive goods as the conscious goal 
of industry, it will appear that productive goods 
receive their value as means to an end, and that 
the amount of this value is dependent upon the 
amount of value of the consumptive goods. If, 
then, the value of these consumptive goods could 



78 THE ECONOMICS OF DISTRIBUTION. 

be rightly considered to be determined by their 
final utility, this latter would be placed in the posi- 
tion of the true determinant of all values. But 
even Bohm-Bawerk, when confronted with the 
question, admits that the final utility of consump- 
tive goods is itself determined by the relations be- 
tween " wants and provision." Now behind " pro- 
vision " or " supply " stands the force of costs. 
So that where the value of consumptive goods seems 
to determine the value of productive goods, it is 
not more because the final utility of consumptive 
goods determines that of productive goods than 
because the final costs of productive goods have 
already determined the costs of the consumptive 
goods, and so helped to determine the very value 
which appears to be reflected back. If we choose 
to disregard the " suction " exercised by demand 
for consumptive goods and to follow the mere 
" flow " of the industrial stream from the early 
processes onward toward consumptive goods, it 
seems equally plausible to represent the value of 
productive goods as determining that of con- 
sumptive goods. 

In fact, the flow of the accumulative force of 
utilities and costs is in opposite directions. So 
far, then, as the actual determination of the value 
of a stock of productive goods is concerned, we 
must insist that there are two sets of efficient 
causes, — those operating through final utility, 
derived from and dependent on the final utility 



LONG-PERIOD PBICES AND VALUE. 79 

of consumptive goods, and those operating through 
final costs (except where natural scarcity takes 
the place of costs). 

§ 10. While, therefore, in a scientific physiology 
of industry, final utility is of supreme significance 
as indicative of the true source of industrial life, 
the motor power which flows from the effective 
demand of consumers of commodities, and which by 
the pressure of its ''final" or ''marginal" activity 
directs and attracts the requisite productive pow- 
ers in every channel of industry, it cannot rightly 
take the place which is claimed for it in the spe- 
cific problem of the determination of the value of 
any stock of useful goods at any point of the 
industrial stream. Our setting of the problem 
of price-change and of value, concerned as it is 
with "efficient" causes must, therefore, hold the 
balance equal between final utility and final cost. 

To achieve such a task careful terminology is 
essential, and, in order to clear our mind as much 
as possible from controversial misconceptions, I pro- 
pose, first, to substitute for the term " value" a gen- 
erally admitted equivalent, which the discussions 
of the Austrian School have brought to the front. 

The value of a supply or of an article of supply 
means the " economic importance " attaching to 
it. There are two advantages in substituting 
the term "importance" for value. ^ In the first 

1 Menger is, I think, the first to identify value with "im- 
portance," in a distinct definition of the term. 



80 THE ECONOMICS OF DISTBIBUTION. 

place, it is prima facie impartial, so far as a 
theory of value is concerned, whereas the term 
"value," from common association, leans toward 
utility. Secondly, it gets rid of the notion of 
" value " as a quality or property of goods, and 
gives emphasis to the true notion of it as an aspect 
or relation. This impartiality, indeed, is not quite 
absolute, for we find Austrian economists, in 
their adoption of the term, already imputing into 
it a bias toward utility as the source of " impor- 
tance."^ 

If, however, taking the following table of ter- 
minology, we approach the central conception of 
economic importance in relation to the concrete 
problem of determination of price, the equilibra- 
tion of prices from the cost and the utility sides 
will be established beyond all controversy. 

" Die Bedeutung, welclie concrete Giiter oder Giiterquanti- 
taten fiir uns dadurcli erlangen, dass wir in der Befriedigung 
unserer Bediirfnisse von der Verf iigung iiber dieselben anhangig 
zu sein uns bewusst sind." (Grundzllge, p. 78.) 

This is paraphrased by Professor Smart as follows, "Value 
is the importance which a good acquires as the recognised con- 
dition of something that makes for the well-being of a subject, 
and would not be obtainable without the good." (Introduction 
to the Theory of Vahie, p. 14.) 

1 Bohui-Bawerk, for example, proposes to define value "un- 
ambiguously and exactly," as : " That importance which goods 
or complexes of goods acquire, as the recognised condition of a 
utility which makes for the well-being of a subject, and would 
not be obtained without them." {Positive Theoi'y, Bk. Ill, 
Ch. II.) 



O -i 






LONG-PERIOD PRICES AND VALUE. 81 

g The importance or value attaching 

I* ^ to a stock of goods changes directly 

^^ g I with any change in the relative rate of 

5p bo supply and demand. But supply and 
demand, in order to be economic forces, 

§ in order to affect importance, must be 

W U^ Hh governed by certain forces behind themo 

o A supply infinite or indefinitely large 

t= "S.g has no economic significance. Com- 

^ wq parative scarcity is the governor of 

§ 4 supply. Similarly, demand receives 

g I its economic significance and power 

w g from effective desire (a willingness and 

^ g ' ability to give something in order to 

2 ^jh^ 8'^^)- Just as there is no economic 

ir* i~< ^ 



O c3 



g ph t> supply of free goods because there 
g "^ I exists no scarcity, so there is no eco- 

5 ph nomic demand for them, because there 



ck 



w j^ is no willingness to give something to 

f^ i, get them. Effective desire is in effect 






g a "scarcity" on the demand side. 

M oQ Scarcity of supply itself is condi- 

^ 4^^ tioned: sometimes bv a restriction, 

o 2 which may be natural, as in the case 



,— I o 



c« § S of certain kinds of land : or the product 

t§ 1 J ^^ circumstances, as the scarcity of food 

[ in a siege, or the scarcity due to an 

.2 organised corner or syndicate. The 

o§ scarcity of "old masters" etc., may 

_§ 2 also be regarded as "natural." 



82 THE ECONOMICS OF DISTBIBUTION. 

In most goods, however, scarcity is due to the 
fact that human costs must be incurred to pro- 
duce a supply. How far the fact that human 
effort is required to produce goods will make 
them scarce, depends very largely upon the rela- 
tion of human effort to natural sources of supply. 
Where there is some natural limit of good or easily 
accessible material, more human effort must be 
expended in each increase of supply. 

Here scarcit}^ is apt to assert itself and forces 
rising importance to press from the cost side. 
Where there is abundant access to natural sources 
of supply, less human effort may be expended in 
each increase of supply. Here the pressure of 
scarcity is abated, and the forces operating on 
supply make for a reduced value or importance 
in each article. Here we have the familiar Laws 
of Increasing and Diminishing Returns. 

Turning to the demand side, we see a similar 
mechanism of economic forces. Effective desire 
regulates demand in the same way in which scar- 
city regulates supply. Effective desire means 
desire backed by purchasing power; it is the pro- 
duct of two factors, a, human utility, or, more 
strictly speaking, the craving for satisfaction 
arising from utility, and /S, purchasing power. 

Human utility has to demand the same relation 
that human cost has to supply. The economic 
forces which operate on cost are the arts of pro- 
duction. The practice of the arts of production, 



LONG-PEEIOD PRICES AND VALUE. 83 

otherwise efficiency of production, will depend in 
part upon scientific considerations, the amount 
of knowledge of the industrial arts, partly upon 
the character or quality of the men who exercise 
these arts, their individual and their collective 
power to avail themselves of the knowledge of the 
arts. Given the same absolute knowledge of 
natural forces in relation to matter and of the 
modes of working, differences of physique, race, 
climate, social and political institutions, and a 
variety of other influences will affect the actual 
cost of producing a given quantity of wealth. 
Again, the effectiveness of the practice of indus- 
trial arts, as we have seen, is always qualified by 
the limits imposed by nature upon the supply of 
matter and natural energy. 

Closely analogous in working are the forces 
which play upon demand. As the arts of pro- 
duction stand behind cost, so the arts of con- 
sumption stand behind utility or satisfaction. 
Any given stock of valuable goods will of course 
depend, for the real satisfaction they afford, upon 
the degree of development of the tastes of the 
consumer and the habits of consumption he has 
formed. There is a skill of consumption which 
rests upon physical laws relating partly to the 
constituents of consumable goods, partly to the 
nature of the consumer, and which consists in a 
right and delicate harmony or adjustment of power 
in securing different kinds and quantities of con- 



84 THE ECONOMICS OF DISTRIBUTION. 

sumption, just as the skill of production consists 
in the delicate manipulation by human and natural 
energy of variously adjusted quantities of raw 
material. As human cost or effort is null and 
void in its contribution to supply, except so far 
as it has access to natural sources, similarly 
human utility or satisfaction is void unless it 
can find its means of expression in purchasing 
power. This latter condition makes desire an 
economically effective force, just as limitation of 
natural suppl}^ makes productive effort effective. 

Remove the limits of matter and of natural 
forces, and the cost of producing any stock of 
goods may shrink to an indefinitely small amount. 
Similarly assume an infinite amount of available 
income or purchasing power, and the smallest 
amount of desire will express itself in an indefi- 
nitely large demand. ^ 

§ 11. The use I claim for this table is not merely 
that it suggests a settlement of disputed termi- 
nology, but primarily and chiefly because it forces 
a recognition of the organic relation between cost 

1 This assignment of a subjective basis of value does not 
conflict with or impair the objective signification which identi- 
fies value with the quantity of other goods for which a good 
will exchange. If we prefer, we may accept the distinction 
made by Wieser of objective exchange -value and subjective 
exchange-value, understanding by the former the quantity of 
other goods for which it exchanges, by the latter the importance 
assigned to it by considerations of scarcity and utility. The 
relation between the two is, that the subjective importance is 



LONG-PEBIOD PRICES AND VALUE. 85 

and utility, and the strictly equal or analogous 
part each bears in determining value. 

It convinces us that there are forces constantly 
passing from both sides to affect the value or im- 
portance of a stock of goods. 

It rejects the compromise sometimes suggested, 
whereby the value of some kinds of goods is said 
to be determined by cost, the value of others by 
utility. 

There are doubtless certain goods which may be 
classified in such a way as to show an absolute 
scarcity or limit of supply, with regard to which 
all changes of value will appear to be the product 
of forces from the side of demand. Pictures of 
old masters, food in a siege, are familiar exam- 
ples. Here human costs appear to exercise no 
direct influence in determining value, which is 
fixed by the relations between absolute scarcity 
and effective desire, and, since the latter is the 
only changing factor, it may be said to be the sole 
direct regulator of the value of such goods at an}^ 
given time. It might perhaps be urged that even 
in these cases cost, though reduced to a mini- 
mum, is not absolutely excluded as an influence 

measured by the objective exchange-value, which is expressed 
either in terms of other goods, or more conveniently in terms 
of money as price. It is, however, more accurate to say that 
the quantity of goods for which a good will exchange, consti- 
tutes not its value, but the measure of its value, though that 
measure is itself commonly referred to an accepted standard of 
money. 



86 THE ECONOMICS OF BISTBIBUTION. 

on value. Supply-markets are not absolutely 
separate one from another, for the demands which 
cause them to be classified are not kept in water- 
tight compartments. It might, then, be urged that 
there is neither a supply nor a demand for old 
masters which is entirely separate from the supply 
and demand of other pictures, or of art goods in a 
wide sense. To take a concrete example, " copies " 
of old masters or "spurious " old masters must cer- 
tainly be held to cater to the same tastes as the 
limited supply of genuine pictures, and may there- 
fore rank as an increase of "supply," which will 
moderate the absoluteness of the " scarcity. " Since 
"costs" will operate upon this portion of supply, 
as in other "freely produced" commodities, the 
influence of these "costs" will presumably have 
some effect upon the value of "old masters." 
Similarly, the effective supply of food in a be- 
sieged city is not an entirely inelastic quantity; 
the amount of it which figures as supply on any 
given day will depend upon the economy with 
which individuals have used the stocks in their 
possession, and the high human " cost " of keeping 
food for a later period of the siege will have some 
influence as a determinant of its value. It is 
scarcely possible to eliminate altogether the in- 
fluence of " cost " upon value save by recourse to 
some impossible hypothesis. 

In both these instances, it may be rightly 
claimed by those who emphasise utility as the 



LONG-PERIOD PRICES AND VALUE. 87 

final cause of value, that human desires, operating 
through demand, are the real forces which evoke 
the " costs " that are necessary to break down the 
absoluteness of monopoly by enlarging the effective 
supply. But this admission of an ultimate causal- 
ity assignable to human desires ought not, as we 
have shown, to affect the economic setting of the 
cases. The influence of human costs and natural 
scarcity cannot be eliminated as direct efficient 
causes of price and value, even by reference to 
extreme and almost extra-economic instances. 

But even if it be admitted that human costs in 
such cases have no influence on supply, and so on 
value, the power of supply as a determinant of 
value is still represented by "scarcity." Whether 
we are dealing with a natural or an artificial 
scarcity, it is never absolute and constant; the 
material of every supply is continually perishing 
or receiving accessions, so that, though the pres- 
sure of demand appears to be the sole source of 
changes of value and of price, there is always 
some slight vital influence proceeding from the 
supply side. Though one of the blades appears 
to do all the cutting, to adopt Marshall's illustra- 
tion, and the other to stand still, if we look closely 
enough, we shall see that the latter nevertheless 
moves. Scarcity is never a mere statical "condi- 
tion " of value, but always exerts an active force. 

Neither can we take the other side and conclude 
with Mill that the value of freely produced goods 



88 THE ECONOMICS OF DISTRIBUTION. 

is derived from and determined by cost. For pur- 
poses of commercial convenience it may be better 
to compare the values of most free goods by refer- 
ence to relative costs or expenses; for whatever 
forces operate from the demand side will be re- 
flected in normal costs, just as the forces from the 
cost side will be reflected in utility. But the 
selection of costs for the more convenient measure 
of values and price-changes must not be under- 
stood to imply that either theoretically or prac- 
tically the forces operating through cost are more 
important than those operating through utility.^ 

Professor Marshall, indeed, suggests that "we 
may say that, as a general rule, the shorter the 

1 The folly of recognising two Laws of Value — one where 
Supply is limited, another where it is capable of increase — is 
well exhibited in the controversy which Bohm-Bawerk has car- 
ried on with Professor Dietzel, in the pages of Conrad's Jahr- 
biicher fur National- Oekonomie, during 1890-1892. Though 
Dietzel had several times plainly formulated the true theory 
which assigns the determination of value neither to cost nor to 
utility, but to the relations between scarcity and utility (cost 
being one source of scarcity), he weakly abandoned to the 
Marginal Utility School the class of limited goods, admitting 
their value to be determined by marginal utility alone, whereas 
he ought to have stoutly maintained that though no "cost" 
entered here as cause, " scarcity," otherwise determined, played 
the same part as a determining factor as in the case of freely 
produced goods. The fact that, in the one case, the " scarcity " 
is rigid, in the other, flexible (by the application of new costs), 
has no effect upon the universality of the Law of Value, though 
for practical purposes of measuring change of value and of 
price, it throws the stress upon the utility side of the equation. 



LONG-PERIOD PRICES AND VALUE, 89 

period which we are considering, the greater must 
be the share of our attention which is given to the 
influence of demand on value ; and the longer the 
period, the more important will be the influence 
of cost of production on value. "^ 

But even this distinction, sound as it is for prac- 
tical purposes, must be rejected if it implies that 
ultimately cost is the more important regulator or 
determinant of value. The operation of a change 
of taste, the growth of a new habit into a standard 
of comfort, will exercise as strong and as abiding 
an effect on the value of a class of goods as any 
change which takes place in the method of pro- 
ducing these goods. 

It may be the case that a larger number and 
variety of more enduring forces operate upon 
value from changes in the arts and conditions of 
production than from the side of consumption, 
but it is not easy to establish the fact. There 
are of course certain classes of goods the value of 
which is more frequently and more largely affected 
by forces which come from one side or the other. 
We may say that the value of wheat is more in- 
fluenced from the supply side, but the value of 
fashionable dress-goods is influenced chiefly from 
the demand side; and in the practical considera- 
tions of market-price and bargaining these facts 
must receive due weight; the study of the relative 
importance of these different forces as they operate 

^ Econ. oflnd., p. 223. 



90 THE ECONOMICS OF DISTRIBUTION. 

on market-price is the most delicate, the most 
difficult, and the most practically important work 
of the modern profit-seeker. 

Taking the wider theoretic view, however, an 
absolute equality in the relation of cost and 
utility toward value must be posited. 

§ 12. The most curious feature in the recent 
history of economic theory is that Jevons, who 
perversely insisted in trying to upset the cost 
theory of Value by plunging into an opposite 
falsehood of extremes, is also the English writer 
who more than any other has laid the true sub- 
jective foundation of a correct analysis of value. 
In his chapter on " Theory of Labour " he works 
out a theory of the relation between cost and 
utility for the individual which is irrefutable. 
He shows exactly how a worker, engaged in sup- 
plying himself with commodities by his own efforts, 
will accurately balance the pain or disutility of 
production against the pleasure or utility of con- 
sumption ; that the number of hours he works, the 
intensity he imparts to his effort, the distribution 
of working energy over different kinds of work, will 
be carefully balanced against the different amounts 
of satisfaction derived from consuming different 
quantities of goods produced by the day's labour. 

It is, indeed, conclusively shown that the eco- 
nomic value of the day's product is similarly and 
equally affected by the disutility or cost of pro- 
duction and the utility or satisfaction of consump- 



long-p£:miod peices and value. 91 

tion; to such a man it will be a matter of equal 
consideration whether he increases his day's effort 
by one unit or reduces his day's satisfaction by 
one unit. 

His analysis of disutility or cost is similar to 
his analysis of utility or consumption. He offers 
a complete setting of the individual economy; in 
reality he lays down the true theory of Value, 
which he misrepresents elsewhere. The objec- 
tion may perhaps be raised that the theory of 
Value cannot be given in terms of the individual 
economy, because no act of exchange takes place. 
But the individual problem contains all the essen- 
tial factors ; if we like, we may treat the case as 
one of exchange worked out between the two sides 
or selves, — the idle self, which shirks effort, the 
greedy self, which seeks satisfaction. The mode 
of balance will be similar, though more accurate, 
than that established in an exchange of commodi- 
ties between two bargainers. The strange thing 
is that Jevons does not apply this theory of Ex- 
change in the individual to society. His formal 
theory of the Individual Economy establishes two 
most important truths : (1) the equal importance 
and the continuous organic interaction between 
final cost and final utility; (2) the essentially 
subjective nature of the problem of exchange.^ 

1 His analysis, p, 189, of his Theory of Political Economy, lays 
the foundation of the subjective treatment of cost and utility, 
which Austrian and American economists have built upon. 



92 THE ECONOMICS OF DISTRIBUTION. 

Yet Jevons, in his "Theory of Exchange," 
ignores the influences which emanate from cost, or 
counts them as indirect agents operating through 
final utility. His treatment of "disutility" in 
this part of his work refers, not to cost, but to 
damage or pain incidental to certain classes of 
consumption. 

In his final chapter, one imperfect glimpse of 
the true problem emerges, where Jevons affirms, 
"The problem of economics may, as it seems to 
me, be stated thus: Given, a certain population 
with various needs and powers of production, in 
possession of certain lands and other sources of 
material; required, the mode of employing this 
labour, which will maximise the utility of the 
produce." If Jevons had added the words, "and 
minimise the 'disutility ' of producing them," his 
statement would have been complete. But in fact 
his work, as the work of all those who attach 
themselves to utility as the special measure and 
determinant of value, is one-sided and defective. 

The perception that cost and utility, resolved 
into their subjective elements of effort and satis- 
faction, are essentially, organically, related in 
the individual economy, must be followed by the 
plain admission of a similar relation in the social 
economy which expresses itself in social value 
and in price. And a scientific statement of value 
must assign a similar relation to the forces affect- 
ing value from both sides. 



LONG-PEBIOD PBICES AND VALUE, 93 



Part II. 

§ 13. This wide excursion into the theory of 
Value may seem to some to have a too remote 
bearing upon the more definite problem of price- 
point and price-change. But this is not really 
the case. Until the precise equality of final cost 
and final utility as determinants of value is estab- 
lished, we cannot fully appreciate the process of 
competition and bargaining which results in a 
price. 

I began by pointing out the fact that behind 
the supply, which figured in any market, there 
were a number of forces relating to scarcity and 
cost of production in the wider market, which 
determined the quantity available at the different 
prices. The same forces bring it about that some 
portions of the market supply are produced more 
cheaply than other parts. The owners of the more 
cheaply produced goods would consent, if neces- 
sary, to sell them at a lower price than the owners 
of the more expensive portion of supply would 
consent to take. In other words, the difference 
of price-limit, which we saw the different sellers 
put upon their goods, arises from differences in the 
cost or expense of producing them. If the supply 
is thus graded according to the cost of its different 
parts, the price which is eventually reached will, 
it is maintained, be such as only just to cover the 



94 THE ECONOMICS OF BISTBIBUTION. 

expenses of the most expensive portion. Those 
who l2ij stress upon this side say that the price is 
determined by the expense of producing this last 
part, or the marginal expenses of production. 
Similarly, the different valuation which was im- 
puted to the buyers is attributed to the superior 
" effective desire " which some exhibit as compared 
with others. The attainment of the horse or the 
quarter of wheat will either satisfy a stronger de- 
sire in some than in others, or an equally strong 
desire backed by a fuller purse. Those who lean 
upon this side say that utility (effective desire) 
of the last portion that is bought determines the 
value of the whole supply. 

§ 14. Now let us turn to our diagram of market- 
price and ascertain how marginal cost and mar- 
ginal utility actually express themselves. We 
shall find that they can be identified with the 
final pair before whose valuation competition of 
buyers and sellers gives way, leaving the price- 
point to be determined by the bargaining of the 
two. 

The competition and " higgling " was seen ^ to 
result in five acts of sale, in which A, B, C, D, E, 
were the sellers and N, O, P, Q, R, the buyers, 
at a price which was finally determined by the 
higgling of a single pair within limits imposed 
by competition. The final pair, whose action 
determined the price-limits, and eventually the 

1 Ch. I, pp. 11-19. 



LONG-PERIOD PRICES AND VALUE. 



95 



price, were seen to be F, with a limit-price of sale 
amounting to X21 10s., and M, with a limit-price of 
purchase amounting to £21, F is the one among 
actual sellers whose limit-price is highest. He 
cannot afford to sell at less than <£21 10s. Why? 
Because he reckons that price will only just cover 



Sellers. Price-limits. 

HGFEDCB A 



30 



26 



25 



21 J 



20 



17 



15 



11 



28 



26 



24 



22 



.21. 



20 



17 



18 



15 



10 



JKLMNOPQE 
Buyers. Price-limits. 



his cost of production, or, more strictly speaking, 
will only give him the minimum gain required 
from a single sale. In other words, F represents 
the most expensive portion of possible supply, 
final or marginal cost. R is the actual buyer 



96 THE ECONOMICS OF DISTRIBUTION. 

whose limit-price is highest; he will pay more 
than any other buyer, because he wants a unit of 
supply most, or because he has more money at 
his disposal, so as to make his " effective desire " 
the greatest. In other words, R is the person 
who imputes the highest utility, and M is the 
representative of final or marginal utility. The 
differential advantages obtained by A, B, C, D, E 
among the sellers, and N, O, P, Q, R among the 
buyers, will thus be found to correspond to real 
differences of cost (expenses) of production on 
the one hand and utility on the other hand. If, 
without making any other change, we transfer our 
illustration from a horse-market to a market of 
some manufactured wares, it will easily appear that 
the larger gain which D, C, B, and A make as 
compared with E upon each sale effected signifies 
and rests upon the special advantages possessed 
by each in economy of manufacture. Similarly, 
it will be recognised that the special gains made 
by O, P, Q, R, in their capacity of purchasers, as 
compared with M, is based upon special amounts 
of utility attributed by them to the same goods for 
trade or for consumption. 

On each side, among the buyers or the sellers, 
the differential gain or "rent" is to be measured 
from the position of a member of the final pair 
representing marginal cost or marginal utility. 
In our diagram the dotted line which connects F 
with M enables us to see at a glance the relative 



LONG-PERIOD PRICES AND VALUE. 97 

size of these differential gains, which include 
those portions of A, B, C, D, on the sellers' side, 
which fall below the price line; and those portions 
of N, O, P, Q, on the buyers' side, which rise 
above that line. 

A certain awkwardness in the setting forth of 
this analysis arises from the fact that F and M, 
the final or determinant pair representing mar- 
ginal cost and utility respectively, do not figure 
in the actual sales effected, but are excluded mar- 
gins. This is due to the fact that our example 
has placed for convenience certain definite inter- 
vals between two valuations of buyers and sellers 
respectively. Under conditions of perfect compe- 
tition the intervals will be infinitely small, and 
E and N, the extremes of actual supply and 
demand, would be legitimately taken to represent 
marginal cost and marginal utility. But for pres- 
ent purposes these margins must be understood to 
lie just outside the actual supply and demand. 

We may summarise the bearing of this analysis 
upon the theory of Value and Price in the fol- 
lowing words: Granting the assumption of the 
mathematical economist that the supply and de- 
mand of a market are infinitely divisible, the 
marginal or final pair, whose transaction directly 
determines price, earn, both of them, an infinitely 
small gain. In such a case either marginal cost 
or marginal utility may be taken with equal cor- 
rectness to measure or determine price and value. 



98 THE ECONOMICS OF DISTRIBUTION. 

If the various contributors to supply and demand 
are likewise supposed to enjoy precisely similar 
advantages of production and to be subject to pre- 
cisely equal pressure of needs, no differential gains 
would emerge, and the market-price would dis- 
tribute the gain, which would be, however, in- 
finitely small on each transaction, with exact 
equality among all who took part. The actual 
circumstances of a real market are found to be 
very different from this. Whether we take a 
short or a long period, a " market " or a "normal " 
price, we find that neither marginal cost nor 
marginal utility exactly determines price or 
value as an independent cause, though in any 
given market one or the other will furnish a true 
measure of price or value. In the transaction 
of the marginal pair which determines price and 
value an element of " forced gain " always emerges, 
smaller where the market is large and free, larger 
where it is small and restricted. The variation 
of the economic resources of the different buyers 
and sellers increases the inequality of distribution 
effected by sales at a common price, by adding to 
this forced gain a differential gain.^ 

1 The notion that cost is a more serviceable measure of 
value, even if it ranks equally with utility as a cause of value, 
based upon the belief that different costs can more easily be 
reduced to and expressed in some common term, such as 
" labour -pov^er " or "labour-time," has no warrant. Labour- 
time, ignoring kinds and intensities and other conditions of the 
giving out of labour-power, is no more a measure of "cost" than 



FIB ST APPENDIX TO CHAPTER III. 99 

FIEST APPENDIX TO CHAPTER III. 

The Subjective Basis of Value. 

In order to mark the essentially subjective nature 
of the theory of Value, it is desirable to distinguish 
more definitely subjective cost and utility from ob- 
jective cost and utility. 

Subjective cost must be taken to consist of the act- 
ual effort of workers measured in terms of disagree- 
able feeling and regarded as a quantity, i.e. disutility 
in work, as estimated by the individual consciousness 
of the worker. Objective cost must be taken to mean 
the productive energy which attaches to this effort, 
referred for measurement to some objective standard, 
i.e. hours, foot-tons, etc. 

Subjective utility will represent the pleasurable 
feeling got out of consumption by the consumer, re- 
garded as a quantity, i.e. the quantity of pleasure got 
from eating a loaf, or burning coals for warmth. Ob- 
jective utility will measure the services of consumable 
goods by some objective standard, i.e. the power of 

abstract "satisfaction" is a measure of utility; and the fact 
that the former is more usually, and, for certain purposes, con- 
veniently, measured by the clock than the latter, gives it no prac- 
tical advantage as a sound and accurate measure of value. It 
is curious to find so keen a writer as Dietzel resorting to this 
crudest fallacy of the Marxian analysis, in his criticisms of the 
marginal utility theory (Jahrbiicher fur National- OeJwnomie, 
B. XX, SS, 587-8), and concluding that, "Whether I reckon by 
cost-value or use-value, the result is the same. But I reckon 
more simply and more accurately by cost-value than by use- 
value." 



t>f «f Q, 



100 THE ECONOMICS OF DISTBIBUTION. 

sustaining life, or f urnisliing physical power contained 
in a bushel of wheat, the actual heating-power in a 
hundred- weight of coal. 

The distinction is of supreme importance in the art 
of economics. For while the subjective cost and util- 
ity which attach to the production and consumption 
of wealth are evidently the true measure of economic 
prosperity and adversity, as interpreted by the present 
conscious estimates alike of individuals, classes, or 
societies, it is equally evident that the operations of 
the actual industrial world, as expressed by many val- 
uations, have direct reference only to objective cost 
and objective utility. 

Now it will easily appear that a given quantity of 
objective cost may be related to indefinitely divergent 
quantities of subjective cost, according as it is distrib- 
uted. A given quantity of labour-power will imply a 
quantity of painful effort which varies (1) With the 
nature and conditions of the work, e.g, according as it 
is monotonous, taxing continuously the same muscles 
or nerves, or varied, according as it implies danger 
of disease or accident from the conditions under which 
it is carried on. (2) With the mode of its apportion- 
ment among the workers, e.g. according as it falls 
upon strong men or upon weaker women and children, 
according as it is given out in a long or short day's 
work, etc. 

A corresponding analysis of utility will show that 
a given quantity of objective utility will vary indefi- 
nitely when reduced to terms of subjective utility ac- 
cording to (1) the nature and conditions of consumption 
to which the objective utilities lend themselves, i.e. 



FIRST APPENDIX TO CHAPTER III. 101 

the capacities and methods of enjoyment possessed by 
the actual consumers ; (2) according to their distribu- 
tion among the consuming public, i.e. food will vary in 
subjective utility from infinity to zero, according as it 
passes into the possession of a starving person or a 
fully-fed one. 

In this analysis, be it observed, no departure is 
made from the commonly accepted economic standard. 
The appeal is not to any such ethical or vital standard 
of values, as Ruskin seeks to substitute for market 
valuations. The present estimate is based strictly 
upon what "is,'^ not upon what "ought" to be; the 
existing conscious valuations of desirable and undesir- 
able, on the part of workers and consumers, are taken 
as the standard. 

Referred to our theory of Value or Importance the 
terms will take the following setting : — 

Stibjective Objecti've Objective Subjectiioe 

Cost. Cost. tftility. Utility. 

Measured Measured Measured Measured 

in units ofv in hours, v Importance yin power of ,in units of 
undesira- \foot-tons, ^ or <^ sustaining <^desirabil- 
bility of ef-^ or other / value ^vital en- ^ity by con- 
fort measures ergy, or fur- sumers 
of output nishing me- 
chanical 
force, i.e. 
nitrogenous 
units or de- 
grees of 
temperature 

Professor Smart ^ suggests a serviceable illustration 
from the production and consumption of a given quan- 
tity of coal. 

1 Value^ p. 6. 



102 THE ECONOMICS OF DISTRIBUTION. 

Subjective Objective Objective Subjective 

Cost. Cost. Utilii/y, Utility. 

Painful ef-\ Hours' v Supply /tt^„+:„„ /Satisfaction 

fort of y work in \ of <( fr^e^ ' \ ^^^^^^ *^^^ 

miners ^ raising coal ^ coal ^ ^ ^ the heat 

The efficacy and f ruitf ulness of this distinction of 
subjective and objective value may be illustrated by 
showing how it clearly explains one difficulty which 
besets the ordinary commercial view of value. Take 
a Supply of commodities : the first portion that is sold 
goes to satisfy the strongest desires of consumers, the 
next portion a somewhat weaker desire, and so on 
until the last portion that is sold satisfies the weakest 
desire, or, using the ordinary language, has the small- 
est utility attached to it. Yet all portions have the 
same price and the same value. Those who insist on 
taking utility as the essence of value find it difficult 
to explain how, with a diminishing utility attached to 
the successive portions sold, the value and price of the 
part which serves the fullest use are as great as that 
which supplies a necessary of life. 

But our tabulation, which makes value = impor- 
tance, shows that the importance attaching to all por- 
tions of supply that are sold is equal. For as the 
subjective utility furnished by consumption of the 
later units of supply diminishes, the subjective cost 
of producing these has increased. The first unit of 
consumption which satisfies the strongest-felt need is 
rightly considered as taking off that portion of supply 
which would be produced if no other were produced, 
because it can be produced most easily. Each later 
portion taken from supply satisfies a weaker need, 
but is produced at a greater cost, and since cost plays 



FIRST APPENDIX TO CHAPTER III. 103 

the same direct part in assigning importance or value 
to an article as does utility, there is no diminution 
of value by a reduction of utility accompanied by a 
corresponding rise of cost. The last portion of sup- 
ply with the least subjective utility has the highest 
subjective cost. 

This has been illustrated by pointing out that the 
last bottle of wine at the millionnaire's feast, which 
furnishes the smallest satisfaction to the drinkers, is 
the bottle, the products of which represents the last 
hour's labour of the hardest-worked producer, i.e. has 
the highest subjective cost attached to it. 

Thus it can be simply shown how it is that each 
separate unit of supply, though it has a different cost 
and a different utility from any other unit, has the 
same value or importance. 

Professor Scott, of the University of Wisconsin, in 
a letter which discusses the relative importance of the 
influence of "human costs" and "human utilities" on 
value, makes the following interesting and pertinent 
remarks concerning "the density and elasticity of the 
medium through which ^ human costs ' produce their 
effect on value." — "Under modern conditions of pro- 
duction there is a long road between human sacrifices 
and changes in the supply of goods. The people who 
furnish these sacrifices are, for the most part, labourers, 
and not infrequently a change of supply, which may 
mean greater sacrifice for them, may not mean greater 
costs for the man whose acts are directly responsible 
for changes in supply. Human costs may, therefore, 
change without producing any change in supply or 
value." This failure of human costs to register their 



104 THE ECONOMICS OF DISTBIBUTION, 

changes accurately in expenses of production, and so 
to operate through supply on value, is of practical im- 
portance, and when in a later chapter I discuss the 
special conditions of the labour-market, the reasons 
for this failure will be evident. 



SECOND APPENDIX TO CHAPTER III. 

Bohm-BawerW s General Theory of Value. 

The elaborate attempt made by Bohm-Bawerk in 
his important work, "The Positive Theory of Capi- 
tal," to derive all " value " from the utility of final or 
consumptive goods, and to refute the " cost " theory of 
Value by showing the ultimate dependence of costs 
upon utility, deserves separate consideration. The 
keen, and sometimes brilliant, analysis by which he 
has traced the flow of utility from consumptive goods 
through the veins of industry in all the productive 
processes, and has thus impressed upon his readers the 
organic unity of the entire industrial system, has in- 
duced many to accept his interpretation of causality 
in value as a sound and conclusive result of close 
reasoning. 

Let us, however, test Bohm-Bawerk's steps, starting 
from his identification of "value" with economic 
"importance," adopting, as far as possible, his own 
statement of his case. 

In the mere identification of value with "impor- 
tance" there is nothing to indicate whether or how 
far the " importance " of a good is derived from, and 
depends upon, the costs of making it or the satisfaction 



SECOND APPENDIX TO CHAPTER IIL 105 

of consuming it. But no sooner has Bohm-Bawerk 
adopted " importance " as a synonym of value than he 
proceeds to ^' bias " it toward utility. When we read 
(p. 138) that, " If the value of a good is its importance 
to human well-being, and if this ^ importance ' means 
that some portion of our well-being is dependent on 
our having the good, it is clear that the amount of the 
goods value must be determined by the amount of 
well-being which depends on if These words make 
it evident that "importance" is already conceived as 
a quality of goods -which comes to the possessor, and 
that ^'well-being" is regarded purely as an effluence 
of consumption. So when the question is once more 
fairly put on the following page (139), "What is the 
gain to our well-being that in any given circumstances 
depends upon a good," the answer already imported 
into the question is " Utility.'' This, indeed, he openly 
avows, declaring that " the measure of the utility 
which depends on a good is, actually and everywhere, 
the measure of value for that good." We have then 
at once and plainly identified " utility " with " impor- 
tance." 

He next proceeds (p. 140) to identify this "well- 
being " or " utility " with " the satisfaction of a want," 
and to insist that the amount of this "well-being" 
derived from a "good "is found in the answer to two 
questions, — " First, ichich, among two or more wants, 
depends on it? and, second, what is the urgency of 
the dependent want or of its satisfaction ? " (p. 140). 
It might be thought that his own use of the word 
" urgency " (which, though called in to explain, only 
repeats the notion originally conveyed by "impor- 



106 THE ECONOMICS OF DISTBIBXJTION , 

tance ") might have bade Bohm-Bawerk pause and 
reflect whether the " urgency " of obtaining a particu- 
lar good might not depend upon the cost of obtaining 
an alternative good as much as upon the intensity of 
the desire of the consumer. But by this time the 
"importance" of a good has exclusive reference in 
Bohm-Bawerk's eyes to the satisfaction in consump- 
tion ; and he proceeds to a careful and highly service- 
able analysis of the kinds of wants, on the one hand, 
and the degrees of wants on the other. Then upon 
this basis he develops and illustrates the theory of 
Marginal Utility in relation to different kinds and 
quantities of consumables. 

Then, strangely enough, after utility has already 
been identified with value and " importance," and mar- 
ginal utility has already been taken as criterion, the 
whole issue is once more thrown into the melting-pot 
by starting the question, " What determines marginal 
utility ? " It now appears (for a little while) that 
the " importance " (or value) of goods is not, as was 
just affirmed, identical with their utility in consump- 
tion. On the contrary. Chapter VI opens with a sane 
statement of the Law of Value which, though loosely 
worded, is essentially correct. 

" Usefulness and scarcity are the ultimate deter- 
minants of the value of goods." Now, not only is 
scarcity thus fetched up from the supply side of the 
equation as a determinant of value separate from 
utility, but it is made the determinant of " marginal 
utility " itself, for " it is the scarcity that decides to 
what point the marginal utility actually does rise in 
the concrete case" (p. 160). 



SECOND APPENDIX TO CHAPTER III. 107 

Now, since " concrete cases " are precisely those to 
which the theory of vahie must apply, Bohin-Bawerk 
is surely affected by a suicidal mania in placing 
^' marginal utility '^ at the mercy of " scarcity." For 
" scarcity '' depends, so far, at any rate, as most goods 
are concerned, upon marginal costs of production, and 
it therefore appears that marginal costs will in these 
cases determine final utility. Here we perceive that 
Bohm-Bawerk has made an abandonment of his posi- 
tion very similar to that which Jevons, by the show- 
ing of Marshall, had made before him. Nor is this a 
momentary lapsus calami, for the writer proceeds to 
develop a theory which, though it no longer maintains 
'^ scarcity " in the dominant position just accorded it, 
equally repudiates the dominance of marginal utility 
for the time being. We are now told that " the height 
of marginal utility is determined by the relations of 
wants and provisions" (p. 160).^ 

But though Bohm-Bawerk goes so far in a footnote 
as to make a perfectly straight declaration of a sound 
theory of Value in affirming that "the relation of 
wants and provisions is the ultimate universal deter- 

1 "Classical economists," as Dietzel remarks, "have some 
ground for dissatisfaction at having served up to them, at the 
end of a long process of investigation, a Law of ' Marginal 
Utility ' which turns out after all to be the familiar ' Law of 
Supply and Demand.' " "The value of a good depends upon 
the amount of its ' marginal utility ' : the latter upon the re- 
lation of needs and provision," says Bohm ; "the others, with 
their formula that price depends upon the relation of demand 
(want) and supply (provision), come to the same result." 
{Jahrbiicher fur National- Okonomie^ Neue Folge, Bd. XX, 
S. 570.) 



108 THE ECONOMICS OF DISTRIBUTION, 

minant of the value of goods " (p. 160), he gives no 
analysis of the ideas of ''scarcity^' and "provision" 
to which he has given such a commanding place, and 
traces no connection between them and " costs." On 
the contrary, in the following chapters, VII, VIII, 
and IX, he returns to his application of the theory of 
Determination of Value by Marginal Utility, just as if 
he had never interrupted or abandoned it. It is not 
until Chapter X that he confronts the real issue of 
"costs." It soon becomes evident that he is destined 
to adopt the same " question-begging " method as that 
by which " importance " was originally identified with 
utility. The "value" of productive goods is what 
we have really to investigate, for the " costs " which, 
according to cost-theorists, dominate value, are ex- 
pressed and contained in productive goods. Now, 
instead of proving that the " value " of productive 
goods, like that of consumptive goods, is derived from 
utility, Bohm-Bawerk simply asserts it as "self-evi- 
dent." "On the lines of our conception of value it 
must be self-evident that a productive good, like any 
other good, can only obtain value for us through our 
recognition that on its possession or non-possession 
depends our gain or loss of some one utility, of some 
one satisfaction of want. And it is equally self- 
evident that its value will be high when the dependent 
satisfaction is important, and low when it is unimpor- 
tant. The only difference is, that, in the case of goods 
for immediate consumption, the good and the satisfac- 
tion stand beside each other in a direct causal relation, 
while, in the case of productive goods, there is inter- 
posed between them and the satisfaction finally 



SECOND APPENDIX TO CRAPTEB IIL 109 

dependent on them a more or less lengthy series 
of intermediate members, their successive products" 
(p. 181). 

AVe have, then, elaborate illustrations of the way in 
which the utility of consumptive goods is reflected 
back upon the productive goods and constitutes their 
value. "The value of each group has its immediate 
measure in the value of its product, the succeeding 
group" (p. 182). So "from stage to stage the name of 
the determining element changes, but under the differ- 
ent names it is always the same thing that acts — 
the marginal utility of the final product" (p. 183). 
We have now a perfectly smooth and intelligible 
theory in which all claims of "costs" to determine 
value disappears (though later on it will be revived for 
" a particular case " of value). In Bohm-Bawerk's own 
words we may piece together and thus condense the 
argument. " Costs are nothing else than the complex 
of those productive goods which have value — the lar 
hour, concrete capital, uses of wealth, and so on, which 
must be expended in the making of a product " (p. 183). 
" The amount of this, their (referring to ' means of pro- 
duction,' and so to costs) common value, is regulated 
for all, in the last resort, by the amount of the mar- 
ginal utility of their finished product " (p. 182). " To 
put it generally : the value of the productive unit ad- 
justs itself to the marginal utility and value of that 
product which possesses the least marginal utility 
among all the products for whose production the unit 
might, economically, have been employed" (p. 186). 

Here is a perfectly consistent statement of the doc- 
trine of marginal utility as the final determinant of 



110 THE ECONOMICS OF DISTRIBUTION 

value of all productive goods. But what has become 
of ^^ scarcity" and the dominant place once assigned 
to it, and where has the interrelation of '^ wants and 
provisions " disiappeared ? 

To get rid of "costs" by merging them in "pro- 
ductive goods," ^ and then to declare that it is " self- 
evident" that the value of productive goods depends 
upon the marginal utility of the consumptive goods 
they are designed to make, is one of the most curiously 
bold iMitiones principii which I have met in the annals 
of illogic. The judiciously minded reader will, at 
any rate, insist upon recalling Bohm-Bawerk to the 
"scarcity" and the "provision" which he has ad- 
mitted to be determinants of that marginal utility of 
consumptive goods which he now seeks to make the 
be-all and end-all of economic activities. 

If his argument in the chapter entitled "What De- 
termines Marginal Utility " is intended to stand, we 
must insist on taking up the assertion there made that 
"it is the scarcity that decides to what point the 
marginal utility actually does rise in the concrete 
case," and the allied, though inconsistent, admission 
that " the height of marginal utility is determined by 
the relations of wants and provisions," and we must 
press for an examination of the bearing of "costs" 
upon scarcity and provision. If scarcity is a direct 

iDietzel pertinently remarks that "had the marginal-value 
theorists given their consideration to the ' power of production,' 
instead of to that of the possession of ' a supply,' they could not 
have so falsified the necessary relation between the value of the 
product and the value of productive or ' cost' goods." (Jahr- 
bucherfiir National- Oeko7wmie, N. F. Bd. XX, S. 580.) 



SECOND APPENDIX TO CHAPTER III. Ill 

determinant of marginal utility, and so of value in 
consumptive goods, it must likewise be a determinant 
of the value of productive goods, not merely the scar- 
city of the consumptive goods reflected back, but the 
particular scarcity of each supply of productive goods. 
For it can hardly be suggested that scarcity of fire- 
irons affects the value of iron ore, but that scarcity of 
iron ore itself does not affect its value. If the rela- 
tion of wants and provisions, or in current economic 
language, demand and supply, govern marginal util- 
ity and value in consumptive goods, as Bohm-Bawerk 
declares them to do, surely it is unreasonable to say 
that the relation of these same forces does not govern 
the value of productive goods. It would be an idle 
inconsistency to affirm that the value of consumptive 
goods is determined, not by marginal utility, but by 
the relations of " wants and provisions," but that the 
value of all intermediate goods is determined by the 
marginal utility of consumptive goods. This position 
Bohm-Bawerk does not, indeed, directly assume, but by 
words from his own pen he can be driven into it. 

The entire trouble arises from his refusal to analyse 
" scarcity '' when he has declared that it determines 
"marginal utility" in "the concrete case." Had he 
done so, he could hardly have failed to admit that 
"' costs " are the direct determinants of " scarcity " in 
most classes of goods. In the first pages of Chapter 
X a partial restoration of "costs" as a "regulator" 
of value takes place. But even here, where the law of 
costs is admitted, " costs are not the final, but only 
the intermediate, cause of value. In the last resort 
they do not give it to their products, but receive it 



112 THE ECONOMICS OF DISTRIBUTION. 

from tliem" (p. 189). The example adduced to make 
this perfectly clear is perhaps the most convincing 
evidence of the petitio principii, with which I charge 
Bohm-Bawerk in his initial dogmatic identification 
of "importance" with "utility." "That Tokay is 
not valuable because there are Tokay vineyards, but 
that the Tokay vineyards are valuable because Tokay 
has a high value, no one will be inclined to deny, 
any more than that the value of a quicksilver mine 
depends on the value of quicksilver, the wheat field 
on the value of wheat, the brick kiln on that of bricks, 
and not the reverse" (p. 189). On the contrary, this 
is precisely what the major number of thoughtful 
economists have always denied ; while admitting that 
the utility of Tokay vineyards depends upon the 
utility of Tokay, they refuse to make the assumption 
that value is identical with utility, and are inclined to 
insist that the " high value " of Tokay is itself, in 
part, determined by the limited quantity of Tokay 
vineyards. This, Bohm-Bawerk has admitted when 
(p. 160) he makes marginal utility depend on " scar- 
city." What natural scarcity does in the case of 
Tokay vineyards, "costs" do in the case of freely 
produced goods. Bohm-Bawerk is right in declaring 
"costs are not the final, but only the intermediate, 
cause of value." But the economic problems of value 
are concerned with intermediate or efiicient, and not 
with final, causes. We may yield to Bohm-Bawerk 
the final causality of utility all along the line, but in- 
sist that the relations between cost (or scarcity) and 
utility are what economists should regard as "causes" 
of value. 



CHAPTER IV. 

THE LAW OF RENT AS THE BASIS OF COORDINA- 
TION OF THE FACTORS OF PRODUCTION. 

Part I. 

§ 1. In discovering the method by which a price 
of goods is determined, we have practically learnt 
how a ratio of exchange is established between 
one class of goods and any other class. For the 
sale of goods for money is admittedly not more 
than half a transaction ; when the money that is 
received has been expended in an act of purchase, 
the transaction is complete; goods have been ex- 
changed for goods. 

But in order to understand more fully the 
nature of this bargain, we must regard any two 
commodities which have been exchanged as com- 
plexes of the various quantities of factors of pro- 
duction that have entered into them in the various 
productive processes. 

A bargain for the sale or the exchange of finished 
commodities will depend, so far as supply-forces 
are concerned, upon the conditions of a number 
of preceding, underlying bargains for the use of 

113 



114 THE ECONOMICS OF DISTRIBUTION. 

different kinds and quantities of land, capital, and 
labour power. How far does our analysis of 
market-price (and value) of commodities apply- 
also to the transactions for purchase of the use of 
these factors? 

The market-price of commodities contained, 
over and above the measure of marginal cost or 
marginal utility, a residuum of "forced gain," and 
also allowed a series of differential gain^ to accrile 
to the stronger buyers and sellers, measured from 
the position of the marginal buyer and seller. 

§ 2. Do the same conditions hold for the pur- 
chase of the use of the factors of production ? If 
we regard the hiring of factors of production as 
equivalent to the sale of their use, we are con- 
fronted with the investigation of the market for 
the sale of the use of various supplies of land, 
labour, and capital. 

Now these markets differ in one radical respect 
from a market for commodities, in the mode of 
measuring the supply. In our setting of the 
horse-market, and any other market for goods, a 
supply was reckoned for purposes of bargain as 
consisting of a number of units of equal quantity 
and quality. Where the wheat or wool in a 
market consists of different qualities or kinds, it 
will, in theory and usually in practice, rank as a 
number of separate supplies subject to separate 
bargaining. Our differential gains in such a 
market measured the different valuations set by 



THE LAW OF BENT. 115 

buyers or sellers upon goods which were held to 
be identical in size and quality. Now in a market 
for the sale of the use of labour and land no for- 
mal reduction to equal sized units takes place. 
Though the real object of sale is a quantity of 
productive power vested in land or labourers, 
what is nominally bought and sold is the use of 
so many acres, or so many labourers, containing 
each of them an indefinitely larger or smaller 
quantity of productive power. But while the 
bargainers express themselves in terms of acres 
and labourers, the real object of their bargain is 
the use of land-power and labour-power, and they 
are continually engaged in reducing acres and 
labourers to units of productive power when they 
buy and sell. The maintenance of this awkward 
mode of measuring land and labour, and the 
necessity of finding some standard of reference in 
order to ascertain the quantity of productive power 
contained in an acre or a labourer, has given rise 
to a grading of these factors of production which 
has played a large part in economic theory. In 
particular, it has given rise to the habit of taking 
the least productive land and labour as a standard 
of reference, and reckoning the productivity of 
better land and labour by comparison with this. 
Thus the better land and labour in a supply is 
held to obtain a differential gain or rent which 
measures the excess of its productive power over 
the worst land or labour. If an acre of the worst 



116 THE ECONOMICS OF DISTRIBUTION. 

land in use contains 4 units of land-use, then an 
acre of better land containing 8 units has a differ- 
ential rent of 4 units imputed to it. Now it is 
important to observe that these differential rents 
are in no sense equivalent to the differential gains 
which arose in a market of goods. The latter 
represent the different valuations put by different 
buyers and sellers upon similar objective quanti- 
ties, the former represent valuations of different 
objective quantities. In order to place the sale 
of factors of production upon the same level with 
markets for the sale of goods, it will be necessary 
to eliminate these objective differences which rest 
upon customary modes of measuring the reposi- 
tories of productive power. 

Bat since economic theory has felt obliged to 
adopt for many purposes the conventional modes 
of measuring productive power, and has derived 
thence certain laws which play an important part 
in the theory of distribution, it is necessary to 
accept provisionally the current custom of measur- 
ing land by its acreage per annum, labour by the 
labourer per hour or week, and capital by its 
money value, in ^100, until we have discovered 
a method of common measurement of the factors 
which any satisfactory theory of distribution re- 
quires. 

The general tendency of economic science, es- 
pecially in England, has been to assimilate the 
theory of the sale of capital-use and labour-power 



THE LAW OF RENT. 117 

to that of the sale of goods, but to mark off the 
sale of land-use as subject to quite other economic 
laws. 

I propose to bring the sale of the factors of pro- 
duction under the general laws of value and of 
price as disclosed by the investigation of bargain- 
ing for commodities. 

For this purpose it is necessary (1) to coordinate 
the three factors with respect to the conditions 
which regulate their price ; (2) to show that their 
sales are in essence identical, as economic pro- 
cesses, with the sale of commodities. 

It is most convenient to approach the first of 
these tasks by examining the validity of the claim 
to assign a separate law to the determination of 
the rent of land. 

The separatist doctrine may be thus summarised. 
Ricardo's fundamental assumption, upon which it 
still rests, is that the use of land is the use of 
certain " inherent and indestructible properties of 
the soil," certain fixed supplies of land of given 
fertility and position; that the efforts of man 
cannot increase or diminish these supplies. So, 
whereas the price of the use of capital and of 
labour may be determined by processes of compe- 
tition and higgling based upon the will of indi- 
vidual bargainers to increase or reduce the effective 
supply, the price of land-use will be determined 
directly by circumstances not relating to land but 
to the efficiency of capital and labour in those in- 



118 THE ECONOMICS OF DISTBIBUTION, 

dus tries into which land-use enters. That is to 
say, rent is a surplus, land taking in payment 
for its use whatever residue is left after human 
efforts and sacrifices are remunerated at a com- 
petitive price. 

§ 3. Now, since the determination of price is 
our objective, it will be most profitable to test the 
validity of this separate treatment of land by 
examining the arguments which are adduced to 
support the doctrine that rent of land forms no 
element in prices, "does not enter into price," 
and does not help to determine prices. 

Two lines of argument have been used to sup- 
port this conclusion: the first has reference to 
extensive cultivation with a margin represented 
by the worst pieces of land in use ; the second to 
intensive cultivation with a margin represented 
by the worst productive power in use, contained 
in a particular piece of land. 

These two arguments are often adduced as con- 
tributory to the same result and as consistent with 
one another. This, I propose to show, is not the 
case. 

The first argument is that with which we are 
familiarised by Ricardo's presentation in Chapter 
II of his "Political Economy." We are to 
suppose different quantities of land taken suc- 
cessively into cultivation to contribute to a single 
supply: the "marginal" land in use at anytime 
will pay no rent ; the produce raised on this mar- 



THE LAW OF BENT, 119 

ginal land with the largest expenditure of labour 
and capital per unit of produce will be the " regu- 
lator " of the price of the whole supply. Since no 
portion of the value of the produce of this marginal 
land is taken for rent, "rent is not a component 
part of the price of commodities." Ricardo leaves 
it to be inferred that since the worst quantities of 
labour and capital engaged in production pay some 
wage and interest to their owners, wage and in- 
terest must always be component parts of the price 
of commodities. 

Now this reasoning, so far as it relates to dif- 
ferential rents, measuring the superiority of par- 
ticular lands over the margin, is, of course, 
irrefutable. But its assumption that a margin of 
cultivation is composed necessarily of no-rent 
land, has been exposed, by Adam Smith in antici- 
pation and by numerous writers since Ricardo. 
It is quite unnecessary to have recourse to the 
historical arguments which Carey and others have 
used to show that the extension of the margin of 
cultivation is not necessarily, or in point of fact, 
from better land to worse. These arguments are 
faulty in that they ignore the part which position 
for market takes in determining the goodness or 
badness of land. 

The assumption that the extensive margin is 
necessarily a no-rent margin arises from a falla- 
cious simplicity in the abstract setting given by 
Ricardo to his problem. If all land is considered 



120 THE ECONOMICS OF DISTRIBUTION. 

as contributing to a single supply, e.g. wheat, and 
if this supply contains more land than is required, 
some of which is slightly inferior to the worst 
land in use, the margin will be no-rent land. 

But neither of these assumptions is absolutely 
warrantable. 

Suppose that an increase in the population and 
the demand for wheat brings into cultivation all 
the land available, the worst land in use may or 
must pay an actual rent. This will not be a 
differential rent, but a forced or scarcity rent 
limited in its rise only by the pressure of the need 
for land, and representing the power of the stronger 
bargainer in the final pair that determines the 
market-price.^ Such forced rent would evidently 
be reckoned as an expense incidental to all por- 
tions of the wheat supply, and would enter into 
the prices. But this may be held to lie outside 
of practical economics for a country in open com- 
mercial relations with the world supply of land. 

What really invalidates the Ricardian treatment 
is the fact that most land in use has several al- 
ternative uses or can contribute toward several 
different supplies. 

Though the worst grazing land may pay no 

1 The adjective "monopoly " has been often applied to such 
scarcity rent by economists ; but, though bearing some analogy 
to a monopoly or " one-man market" by reason of the dicta- 
torial power held by the marginal owners, this marginal rent 
is best described as a scarcity rent or forced gain. 



THE LAW OF BENT. 121 

rent, the worst wheat land might be better for 
grazing than the worst grazing land, in which 
case it can only be obtained for growing wheat by 
paying a little more than its differential rent for 
grazing purposes; this rent for the worst wheat 
land will be a positive rent, and will enter into 
wheat prices ; again, the worst market-garden land 
competing for a given market may be tolerably 
good wheat land, and, if so, the rent which it could 
get for wheat forms a marginal rent for market- 
garden land. So as we ascend to the higher and 
more special uses of land, we find that the differ- 
ential rents must be measured, not from a no-rent 
margin, but from a minimum specific rent of a 
higher and higher order, until we get to city 
ground, which is measured from a minimum which 
must exceed the rent which that land could obtain 
for the best agricultural use to which it could be 
put. 

The accompanying figure will serve for illus- 
tration. Suppose the city A to lie in the middle 
of a fertile plain surrounded by belts of land de- 
voted to different uses. The outermost belt, E, 
is rough pasture, improving in quality and posi- 
tion as it approaches D, so that whereas the 
pasturage at the outer belt of E pays no rent, a 
gradually rising differential rent emerges as we 
approach the circle D. Similarly, let us suppose 
the belt of laud between D and C to be engaged 
in growing cereals, the Vv^ortst cereal land being at 



122 THE ECONOMICS OF DISTRIBUTION. 

D, and the land as we approach C gradually im- 
proving for cereal use. If the worst cereal land 
at D would be of equal value for grazing to the 
grazing land midway between D and E, it will be 
rented for cereal use at a rent which is equivalent 
to or slightly higher than the differential grazing 
rent paid by the land midway between D and E. 
Thus the marginal land for cereals will be found 
paying a positive rent, and the differential rents 




for cereals will be superimposed upon that mar- 
ginal rent. Again, as we come nearer to the city, 
crossing the circle C, we come to a belt of land 
utilised for market gardens, improving in quality 
and position as we near the circumference B. If 
the worst of this market-garden land in C is capa- 
ble of being cereal land of middling quality, the 
marginal market-garden land will pay a rent 
equivalent to the marginal cereal rent and the 
differential cereal rent for middling quality of 



THE LAW OF BENT. 123 

cereal land. In the same way it will appear that 
the worst land of the next belt, B, devoted to 
suburban uses, will pay a still higher marginal 
rent, based upon the fact that the worst suburban 
land at B may be capable of drawing a high dif- 
ferential rent for market-garden purposes. When 
we finally reach A, the city itself, the worst ground 
may draw a ground rent higher than that drawn 
by the margin of suburban land.^ 

For the sake of simplicity I have assumed that 
the marginal rent is directly and exactly deter- 
mined by the alternative use of the worst land in 
cultivation for each use. But this, of course, is 
not necessarily the case. It is not necessary that 
the worst land should have an alternative use ; it 
may be some better land, enjoying a differential 
as well as a marginal rent, which occupies that 

1 This argument which makes "marginal rents" hinge upon 
*' alternative uses'''' of land may appear to lean unduly toward 
the doctrine that "marginal utility" determines values. But 
though the marginal utility theory can neatly illustrate the 
variation of values connected with different uses, natural varia- 
tions in their bearing upon scarcity of supply can afford a 
similar "illustration" from the other side. The existence of 
"alternative uses" v/ith different values may be explained 
either by the different chemical and other qualities of the soil 
(the intensity of various wants being given) or by the growth 
and intensity of different human wants (the differences in quali- 
ties of soil being assumed) . The true explanation makes the 
value of "alternative uses" directly dependent on the relation 
between natural qualities of soil and human wants. Here, as 
elsewhere, "marginal utility" may be regarded as the final 
cause of value, but not as the sole efficient cause. 



124 THE ECONOMICS OF DISTRIBUTION. 

position. The worst wheat land might obtain a 
marginal rent of 20s. per acre ; superior qualities 
of wheat land might take higher rents rising to 
40s. Suppose that some of the land rented at 
30s. had another use which would yield a rent of 
29s. ; it is evidently this land which fixes the mar- 
ginal rent; it must receive 30s. in order to induce 
it to contribute to the wheat supply, and the 20s. 
taken by the worst land measures its inferiority 
of wheat-growing power as compared with the 30s. 
land. It is possible that the 20s. land might con- 
tinue to grow wheat, however little rent was paid ; 
its rent is directly determined by the cost of keep- 
ing in the supply of wheat land the superior land 
at 30s. In such a case it will be the 30s. land and 
not the 20s. land which is the direct determinant 
of price for the supply side in the market for sale 
of wheat-growing power. The Ricardian analysis 
has, in fact, laid undue stress upon the worst land 
contributing to supply, the so-called margin of 
cultivation. It is important to understand that 
this margin has no particular significance except 
as furnishing a convenient measure for the ready 
reckoning of differential rents; it has no deter- 
minant importance. It is the land with an alter- 
native use, which may or may not be the marginal 
land, that not only determines price from the supply 
side, but determines the whereabouts of the margin. 
This can easily be shown by a closer examination 
of the illustration just taken. It is admitted that 



THE LAW OF RENT, 125 

what is really sold in the bargaining between land- 
owners and cultivators for the use of wheat land 
is units of wheat-growing power. The fact that 
the nominal subject of bargain is acres of different 
kinds of wheat land must not blind us to this 
under-truth. Suppose now that the price per unit 
of wheat-growing power, as determined in a market 
set forth after the manner of our horse-market, 
turned out to be 5s. per unit. This price, we will 
further suppose, is determined by the owner of the 
30s. land, which yields 6 units per acre of this 
wheat-producing power, and which, by the posses- 
sion of an alternative use at a price just below 30s., 
has assumed the position of seller in the "final 
pair." The price 5s. has been determined on the 
supply side by the fact that it is required to induce 
this particular land to contribute toward the sup- 
ply of wheat land. Now what about the 20s. land, 
the worst wheat land in occupation, the margin 
of cultivation, which ex-hypothesi only yields 4 
units of wheat-power per acre ? It is quite legiti- 
mate to suppose that the owner of this land, hav- 
ing no available alternative use at any price 
approaching 20s., might have been willing to con- 
tribute to supply even if the price per unit had 
been fixed at 4s., and the rent per acre consequently 
had been at 16s. instead of 20s. In such a case it 
will be evident that it is the owner of the 30s. land 
who, in fixing for the supply side the price per 
unit at 5s. ^ determines the amount of rent per acre 



126 THE ECONOMICS OF DISTRIBUTION, 

of the land at the margin of cultivation. In deal- 
ing with the price of land-use, as of any other kind 
of goods, it is to the strongest bargainer that we 
must look for the direct and final determination 
of a price, and the differential gain of the others 
should rightly be measured from him. It is only 
the conventional modes of selling and regarding 
the sales of uses of factors of production that 
obliges us to depart from this rule, and in the 
case of land makes it convenient to measure dif- 
ferential rents from the worst land in cultivation 
which contributes to the market. 

But though the differential rents thus calcu- 
lated, not from the subjective valuation of the 
"final pair" of bargainers, but from the margin 
of cultivation, are not equivalent in amount to 
the "differential gains " reckoned according to our 
market for sale of ordinary commodities, their 
economic nature is not essentially different, for 
they are determined in the same way. In so far 
as the price of uses of factors of production is 
reached by competition and bargaining (and this 
is our hypothesis throughout), the mode of deter- 
mining rent, interest, and wages will be essen- 
tially the same as that of determining the price 
of horses or wheat, and in order to understand the 
theory of Distribution we must, while accepting 
for convenience the different grading which charac- 
terises the former, penetrate to the essential units 
beneath. In land, we must recognise that rent or 



THE LAW OF BENT, 127 

price of land-use is determined, just like the price 
of commodities, by the relative economic strength 
of buyers and sellers bargaining for a given quan- 
tity of land-use and not for a given sized piece of 
land, though the language of these proceedings has 
reference to the latter. The subjective valuations 
of a single owner and a single tenant (the final 
pair) fix the limits for the price of a unit of this 
land-power, the stronger of the two fixing the 
price-point. This done, the rent per acre is deter- 
mined by the net yield of land-power in each grade 
of land. If the higgling of the market fixes the 
price of a unit at 20s., the best land available for 
that supply may yield 2 units of power per acre, 
in which case the rent per acre is 40s., the worst 
land only -|- an unit with a rent of 10s. per acre.^ 
Thus it appears that the determining increment 

1 The treatment of rent as purchase money of so much land- 
power or use of land will only be fully justified when the full 
theory of coordination of the factors in production is grasped. 
One surface objection, however, may be removed here. In 
speaking of rent as the price of quantities of land-power, it 
may appear as if I had committed myself to the view that all 
land with some quantity of . productive power could command a 
price. To avert the appearance of this error I have used the 
term " net yield of land-power " to indicate the power which 
could command a price. Unless the value of the productivity 
of a piece of land exceeds the expense of working it, there is 
no " net yield of land-power," and, therefore, no price for such 
power. The term " net yield of land-power " represents in the 
use of land what emerges in the case of a machine or other piece 
of concrete capital after expense of working is defrayed. 



128 THE ECONOMICS OF DISTRIBUTION. 

of supply is not necessarily identical with the 
worst land contributing to that supply, commonly 
known as the margin of cultivation. If the slack- 
ness of demand for wheat land causes a fall of 
rent, it is not necessarily the 20s. land which passes 
out of cultivation; it may be the 30s., if the latter 
has an alternative remunerative use and the former 
has not. 

The actual determination of rent by this method 
is, of course, complicated by the fact that as a rule 
not merely one part of the land supply, but many 
parts, have alternative uses to which they would 
succumb, were the price for one use to fall below 
a certain figure. But it is reasonable for us to 
assume that the price per unit of land-use is always 
determined by the common position of one part of 
supply, which at that price is just induced to con- 
tribute toward that supply in preference to some 
others ; the fact that at a different price per unit 
some other land would occupy this position need 
not concern us. 

Now since it is convenient to retain the term 
"margin of occupation or employment " to describe 
the worst or least efficient part of supply, some 
other term is needed to mark that part which 
occupies the determinant place in any given 
market. I propose to speak of this portion as 
"the determining portion of supply," and of its 
owner as "the determining owner." The worst 
land in cultivation for a particular supply will be 



TBE LAW OF BENT, 129 

described, in accordance with usage, as "mar- 
ginal land," and its rent as "marginal rent." 
" Differential rents " will be the rents obtained 
by lands of superior productivity contributing 
to this supply, and will be measured from the 
margin. 

It will, however, be useful sometimes to sub- 
stitute the terms " specific " and " individual " for 
"marginal " and " differential," or to conjoin these 
adjectives in order to emphasise certain aspects of 
our application of the Law of Rent. 

One further distinction requires to be made. 
Whether the determinant portion of supply of 
land be the worst land or not makes no difference ; 
the price of land-power, and so the rent of different 
qualities of land, appears to be directly determined 
by the fact that some of the land has an alternative 
use, and that it may refuse to contribute to the 
supply unless a certain price is paid. But though 
the alternative price that can be got for some other 
use determines a lower limit of marginal rent, 
there is nothing to prevent the marginal rent 
rising higher than this. If the 30s. land has an 
alternative use, it is possible that use might yield 
only 25s. ; now, though the owner of that land 
would consent to take 26s. rent, he may be able to 
get 30s., because there is, for the time, an absolute 
scarcity of land available for this supply. In a 
word, he may be able, as the final seller, to take 
a forced gain of t)s., which corresponds precisely 



130 THE ECONOMICS OF DISTRIBUTION. 

to the "forced gain" in the price of the horse in 
our analysis of a market for commodities. 

In such a case it might be best to distinguish 
this 5s. from the other 25s., and to class it as a 
third form of rent. Thus, if we took the highest 
rented land at 40s., we should describe 25s. as mar- 
ginal rent, 5s. as forced or scarcity rent, and 15s. 
as a differential rent measuring the superior pro- 
ductivity of this land over the land at the margin 
of employment for this use. This would signify 
that 25s. was the price necessary to make this 
land abandon some alternative use and enter this 
particular supply; that its economic force as a 
bargainer, within the market of this use, enabled 
it to exact 5s. more, and that 15s. measured its 
superiority over the absolutely worst land con- 
tributing to this supply. 

Though the actual distribution of land-uses in 
a country will never be so regular as that repre- 
sented in our illustration, the latter approaches far 
nearer to the actual facts than does the Ricardian 
hypothesis, and compels us to perceive that for 
many, if not most, purposes land at the margin 
of cultivation will pay a positive rent. 

The argument from extensive cultivation, though 
quite -valid for showing that differential rents do 
not enter price, lets into price any rents which are 
paid for the use of marginal land contributing to 
any supply. Land may be graded according to its 
economic uses; the differential rents will be ex- 



THE LAW OF RENT. 131 

eluded; the positive marginal rents will be in- 
cluded in the market (and even in normal) prices. 

§ 4. Yet, though Adam Smith, in dealing with 
wine lands and other cases of limited supplies of 
land, J. S. Mill, in the formulation of the Laws of 
Value, Jevons, and other modern economists have 
explicitly affirmed that scarcity prices of land all 
enter into prices. Professor Marshall and not a few 
thinkers reject this view. 

It is of the utmost importance to understand 
the grounds upon which this rejection is based. 
Jevons admits that a marginal rent enters into 
expenses of production, " If land which has been 
yielding £2 per acre rent, as pasture, be ploughed 
up and used for raising wheat, must not the £2 
per acre be debited against the expenses of pro- 
duction of wheat? "^ Marshall, in commenting 
upon this passage, urges that "there is no con- 
nection between the particular sum of X2 and the 
expenses of production of that wheat which only 
just pays its way."^ That is to say, though the 

1 Preface, 2d ed., Theory of Political Economy. 

2 Book V, Ch. VIII, par. 6 (note). There is, however, a 
curious passage in the sections immediately preceding this, in 
which Marshall himself seems to admit that a marginal rent 
does affect price. One of the chief conditions affecting the nor- 
mal value of oats will be " the amount of land which is capable 
of growing oats, but for which there is so great a demand for 
other purposes that it affords a higher rent, when used for them, 
than when used for growing oats. For the expenses of produc- 
tion of those oats tohich only just pay their way are greater than 
they ivould be, were it not that much of the land which would 



132 THE ECONOMICS OF DISTRIBUTION, 

worst land contributing to the wheat supply pays 
a rent of £2 per acre, no portion of that rent enters 
into price. This rejection of marginal rent from 
price is achieved by turning from the extensive 
to the intensive margin of cultivation. 

Upon this mode of reasoning those economists 
rely who assert that in no case does rent enter into 
price, and who extend the principle from agricul- 
tural rent to all other rents. The argument, first 
plainly formulated by James Mill, briefly and 
occasionally used by Ricardo, runs as follows: — 

return the largest crops of oats to the smallest outlay is diverted 
to growing other crops that will enable it to pay a higher rent 
than oats would afford; and therefore the rent that land on 
which oats could be grown can be made to pay for other pur- 
poses, though it does not enter into the expenses of production 
and the normal value of oats, yet does indirectly affect them. 
(Bk. V, Ch. VIII, par. 5.) 

Marshall does not explain how it "indirectly affects them." 
The passage seems to admit that the positive marginal rent of 
oat land, arising from alternative uses, will raise the price of 
oats, somehow, without entering into the marginal expenses 
of production, although this is inconsistent with the opening 
words of the same paragraph, where it is said that ' ' the 
expenses of production of those oats which only just pay their 
way are greater than they would be " if marginal oat lands 
could be got at no-rent. The fact is that Marshall is quite 
wrong from his standpoint in admitting that "the expenses of 
production of those oats, which only just pay their way, are 
greater than they would be," etc. The application of the 
"dose" principle to an intensive margin of cultivation, upon 
which he relies through his main argument, will oblige him to 
ignore altogether the positive rent which must be paid for the 
extensive margin of oat land. 



THE LAW OF BENT. 133 

Take a given piece of land, apply to it " doses " 
of capital and labour remunerated at tlie ordinary 
rates of interest and wages. The produce raised 
by the earlier applications of capital and labour 
will leave a residue, after the fixed payments of 
interest and wages, which will figure as rent. 
The economic tillers of the soil will increase the 
number of these " doses " of capital and labour 
until the last dose yields just enough to pay in- 
terest and wages, leaving nothing for rent. Since 
no part of the produce obtained by the application 
of the last " dose " can be reckoned as rent, while 
the expense of raising this last part of the produce 
measures the price of the whole supply, it follows 
that rent does not enter into the price. 

Economists have often evinced some hesitation 
in applying the doctrine that rent does not enter 
into prices to manufactured goods ; but Professor 
Marshall has clearly shown that a fair expansion 
of the older argument requires us to hold that 
"ground rent does not enter into the expenses of 
manufacture."^ 

Now the most curious feature of this illustration 
is that it can be similarly applied to show that 
interest and wages do not enter into price. 

Instead of taking a given quantity of land and 

applying additional doses of capital and labour, 

let us take a given quantity of capital and apply 

additional doses of labour, neglecting for the 

^Principles of Economics, 2d ed., p. 462. 



134 THE ECONOMICS OF BISTBIBUTION. 

present the consideration of land. Let our piece of 
capital be the premises, stock, good-will, etc., of 
a shop. Apply to this capital additional doses 
of labour in the shape of shop assistants. The 
assistants first engaged will earn not merely their 
wages but a considerable surplus, which will go 
as interest and profit to the owner of the business. 
Assuming there is plenty of labour available, the 
shopkeeper will go on increasing the number of 
his shop assistants as long as the last-engaged 
produces more value than is represented in his 
wages. At last he will come to a "marginal" 
assistant, who only just produces the value of 
his wages. Now the shop goods into which this 
"marginal " assistant puts his work pay no interest 
or profit ; but they are sold for the same price as 
the other shop goods, and being produced under 
the least favourable circumstances, i.e. at the mar- 
gin of labour, must be considered to measure the 
price. Since no portion of the value added to 
these goods in the retail process can figure as in- 
terest, so interest on shop capital is no component 
part of the price. Or, again, take the machinery, 
stock, good-will, etc., which constitute the capital 
of a given factory. Here, too, after a certain point 
in the application of labour is reached, the same 
law of diminishing return is found to apply ; each 
"hand " beyond a certain number yields a less and 
less surplus of value over and above his wages, 
until a "hand" is reached whom it is just worth 



THE LAW OF RENT. 135 

while to engage because the value of his work just 
covers his wages. The "goods" made by this 
last hand evidently pay no interest or profit, and 
as they are precisely analogous to the grain pro- 
duced by the application of the last dose of capital 
and labour to a given piece of land, they govern 
price, and therefore interest does not enter into 
the price of manufactured goods. ^ 

Marshall, indeed, in one passage, applies the 
"dose" illustration to show that one of the shep- 
herds employed upon a large sheep farm is to be 
regarded as a "marginal shepherd," whose produc- 
tivity only just earns his wages. ^ But curiously 
enough he fails to recognise that he has proved 
the expenses of raising sheep to be determined 
by this man's wages, and that interest or profit 
of farm capital does not enter into the price of 
sheep. 

Finally, we can take a fixed quantity of labour- 
power and apply to it successive doses of capital 
or land. First take the energy and skill of a 
single business man who borrows doses of capital 
for a commercial enterprise. The last dose he 
borrows only yields to. him a minimum or nominal 

1 1 may here state that I use interest for the return made for 
use of concrete forms of capital and not merely for capital val- 
ued in money. When necessary, I distinguish the two as 
"real" and "money" interest. Thus alone can one evade 
the Protean term "profit." 

2 Principles, 2d ed., Vol. I, p. 567. 



136 THE ECONOMICS OF DISTRIBUTION. 

return after paying its necessary interest, i.e, he 
cannot profitably utilise any more. It therefore 
appears that the last increment of the goods he 
handles in his business yields no earnings of 
management. Therefore earnings of management 
form no element in expenses of production or of 
price. 

Or take the case of an agriculturist in a country 
where there is plenty of available land of a given 
quality at a fixed or customary rent. The produce 
raised by such a man upon the few acres he first 
rents may yield him, after paying the stipulated 
rent, a large surplus which he will take as wages. 
Let this labourer increase the acreage he rents; 
beyond a certain point he will find that the pro- 
portion of the produce obtained by each successive 
application of more land, which is left for wages, 
becomes less and less, until he reaches an applica- 
tion which, after paying rent, does not increase 
the net surplus which he takes as wages. In other 
words, the produce obtained by this marginal 
application of land to labour "pays" no wage. 
Since this marginal produce measures and indi- 
cates the price of the whole supply, wages do not 
enter into that price. Now in respect to the 
supply-price of agricultural produce in any given 
market, it is held that rent does not enter into 
price because a portion of that supply is obtained 
under conditions which preclude any part of it 
from counting as rent. So it must be held that 



^ THE LAW OF BENT, 137 

wages do not enter into the price because another 
portion of that supply may, as we have seen, have 
been obtained under conditions which forbid any 
of it from contributing to wages, while interest 
does not enter into price because a third portion 
is raised under conditions which require that it 
all go for rent and wages and none of it for 
interest. We have only to suppose three pro- 
ducers — the first of whom has a fixed quantity of 
land, and keeps adding fresh doses of capital and 
labour; the second with a fixed quantity of capital, 
which he spreads over increasing quantities of 
land and labour; and the third with a fixed quan- 
tity of labour, to which he applies ever increasing 
quantities of land and capital — to arrive at the 
conclusion that neither rent, interest, nor wages 
is a component part of "price." 

To this reductio ad ahsurdum we are inevitably 
brought by following out the line of argument 
usually adduced to show that rent does not enter 
into price. 

§ 5. This line of reasoning, however, though 
it compels the admission of a fundamental error 
in the "dose " illustration as applied to intensive 
cultivation, does not explain the nature of that 
error. The truth is that a certain harmony of 
combination of factors of production exists for 
various productive purposes. In a given case, a 
certain proportion of the three factors of produc- 
tion is most productive. If, however, there is a 



138 THE ECONOMICS OF DISTRIBUTION. 

short supply of one of them at the former quality 
and price, a more than proportionate increase of 
one or both of the others may be substituted, in- 
volving, of course, an increased cost per unit of 
the increment of supply. 

So when the final dose of capital and labour on 
a given piece of wheat land achieves a product 
which yields no rent, it means that with the same 
quantity of land-use as sufficed for a smaller 
product, a larger quantity of capital and labour- 
use has been combined; that as no more land-use 
was employed, none was paid for. 

Or, if it seems more reasonable, we may consider 
a piece of land as containing various land-powers, 
some high, some low — some powers so low that 
they require so large a proportion of capital and 
labour to utilise them that they only just pay to 
work. These low natural powers yield no net 
economic powers of production. 

Now take the case where a portion of the final 
increment of a supply of wheat is raised on the 
extensive margin at a positive rent of 2 units, and 
a portion upon the intensive margin where it is 
held to pay no rent. It is evident that the cost 
of production is the same in each case, though rent 
forms 2 units of cost (out of say 10) in one case 
and none in the other. Where the intensive mar- 
gin is taken, 2 more units of cost of use of capital 
and labour are found. The man who chooses be- 
tween paying for worse land-use or for more 



THE LAW OF BENT. 139 

capital- and labour-use exercises a choice between 
the factors of production which implies their 
interchangeability. Either land-power or capital- 
and labour-power may do the extra Avork required 
to raise the last increment ; if the former is pre- 
ferred, rent is paid; if the latter, rent is not paid, 
but more profit and wage. This interchangeability 
is a fact of prime importance in understanding the 
theory of distribution. 

If, because land-use can be replaced by capital- 
use, we choose to say that rent does not enter 
money-cost of production, we are, strictly speak- 
ing, justified in doing so. But by a similar argu- 
ment it is possible to show that interest and wages 
need not enter money-cost of production. 

The last increment of cotton cloth in the supply 
may be the produce of the worst loom in the worst- 
equipped mill (i.e. raised on the extensive margin 
of capital), or it may be the produce of a good 
loom in a good mill working overtime: in the 
former case it is partly produced by capital-use, 
which may be paid by interest; in the latter case 
there is no extra call on capital. (Or taking tlie 
analogy of lower un-paid powers of land, we may 
say that lower power of capital entered in unpaid.) 
In the former case, the final increment of cotton 
cloth yields an interest; in the latter case, it only 
just pays overtime wages; by taking the latter 
case, we prove that interest forms no element in 
the price of cotton cloth. But it must be observed 



140 THE ECONOMICS OF DISTRIBUTION. 

that the money-cost and the price of the final 
increment of the cotton cloth will be the same, 
whether it is said to include profit or not. 

§ 6. We have shown how rent need not enter 
money-cost of production and price of wheat 
where the final increment is produced on the in- 
tensive margin. By a similar application of the 
Law of Substitution it can be shown that wage 
may or may not enter into the price of this same 
final increment of wheat. Suppose it is raised by 
a tenant-farmer as part of the result of an extra 
last hoeing and ploughing on his land, it pays 
extra wages but no rent; if, however, instead of 
this extra hoeing and ploughing the farmer decided 
to hire one more acre of the same quality of land 
and spread the same amount of labour-power over 
the larger area, the product of this last acre pays 
its rent but no wage. 

Or, again, take the case of a 4-loom weaver ^ who 
decides it is just worth his while to undertake 
a 5th loom; the product of the 5th loom, after 
paying a profit and a compensation for extra wear 
and tear to the weaver, yields him no true increase 
of wage. The real wage, or net advantage, which 
he obtains by working 5 looms only exceeds by 
a nominal amount the net advantage of working 
4 looms. 

1 The assumption here is that the weaver is on time wages. 
The rarity of such an occurrence need not he taken to invali- 
date the illustration. 



THE LAW OF RENT. 141 

The labour of working the 5th loom or the last 
acre of land is certainly remunerated by wages, 
and at the same rate as the other looms or other 
acres. Why, then, does it appear from the "dos- 
ing " illustration that the product of the lai-st loom 
or last acre pays no wage ? 

Only two replies are possible. First, it is pos- 
sible to suppose that the weaver's capacity was 
underrated, and that he had been put to 4 looms 
when his normal energy was equal to 5 looms. 
Now it is evident that if a 5-loom weaver is 
set to work 4 looms, there is an absolute waste 
of labour-power; if the mistake is discovered, and 
the waste stopped by adding a 5th loom, the 
weaver, assuming he were on time wages, might 
receive no additional wage. Similarly, we may 
suppose that the farmer underestimates the number 
of acres upon which he may most profitably spread 
his labour-power; discovering his mistake, he may 
add the extra acre which seems just to pay its rent 
and leave nothing for his wage. 

Now the sophistry of these examples is patent. 
If an employer hires a worker and misapplies his 
working power, he must pay as much as if he had 
properly applied it; if a farmer does not under- 
stand the economy of his labour-power, he may 
expend upon a smaller area the same quantity of 
power which he ought to have bestowed upon a 
larger area. If a tenant hires a piece of land and 
puts 5 doses of capital upon it when he ought to 



142 THE ECONOMICS OF DISTRIBUTION. 

have put 6, he pays a rent based upon the suppo- 
sition that he will make a full economic use of the 
land, i.e. that he will put 6 doses on it. If, dis- 
covering his error, he afterward adds the sixth 
dose, he only appears to pay no rent out of its 
produce, because he has all the time been paying 
a rent based upon the supposition that he was 
working his land with 6 doses. 

The conclusion is a peculiarly simple one. If 
we make an uneconomical use of a factor of pro- 
duction, we must pay the same price for it as if 
we made an economical use of it. 

Some of the " dosing " illustrations are thus 
vitiated by treating the owner of a factor of pro- 
duction as if he were not an "economic man," 
whereas the just application of a principle, like 
the Law of Diminishing Returns, does not permit 
such an assumption to be made.^ 

§ 7. But the " dosing " illustration is vitiated 
by a more fundamental flaw. By assuming the 
separate action of each dose, it ignores the organic 
relation of parts in industry. It is not necessary 
to suppose that the 5th loom was added to the 

1 If I rent a piece of land in Piccadilly, in which all houses 
are 3 or 4 stories, the rent I shall pay will take into considera- 
tion the capacity of the ground for building a 3- or 4-story 
house. If I choose to put a 1 -story house upon the ground, the 
rent I pay will be the same as if I had more fully utilised the 
site. If afterward I add stories, it will seem that I pay no rent 
for this extra accommodation, but in reality I have been paying 
it all the time. 



THE LAW OF RENT. 143 

weaver because it was found out that he had been 
paid as a 5-loom weaver while he had been work- 
ing at 4 looms. We may suppose that he is in 
full knowledge of the facts and has a full exercise 
of choice ; as a consequence, he estimates that it 
just pays him to work 5 looms instead of 4. Now 
why will it appear that, whereas the weaver, when 
working 4 looms, made a net wage on each of them, 
he makes a merely nominal wage on the 5th loom ? 
The 5th loom, after it is added, is found to be 
just as productive as any of the other 4 looms. 
The answer is plain. The 5th loom only just 
pays because its addition has injured his work 
with the other 4 looms ; he must work 5 looms at 
slower speed than he worked 4, stoppages will be 
more frequent, more time must be spent on tun- 
ing, cleaning, etc. If he gives out the same work- 
ing energy to 5 looms as formerly he gave to 4 
(which supposition is involved in our hypothesis 
that to a fixed quantity of labour-power is added 
a fresh increment of capital), the effort of adding 
the last loom can only be estimated by taking 
account of its influence upon the productivity of 
the other 4 looms. 

So, reverting to our illustration of a fixed quan- 
tity of shop-capital which for its most profitable 
working requires 10 shop-assistants. The tenth 
shopman, whichever he may be, appears only just 
to produce enough to pay his wages, because it is 
evident that it would not pay to put in an eleventh 



144 THE ECONOMICS OF DISTEIBUTION. 

shopman. But the productivity of this last unit 
of labour cannot be rightly separated from the pro- 
ductivity of the other units, as is supposed when a 
particular additional increment of product is at- 
tributed to his presence. The service of this final 
unit of shop-labour largely consists in enabling 
the shop to be better ordered, and a better division 
of labour to be adopted; in other words, it helps 
to raise the general efficiency of all the labour 
employed. 

The same is true, though within narrower 
limits, of the effect of the last dose of capital 
applied to a given piece of land; its effect is not 
a separate one, but partly consists in the greater 
efficiency imparted to earlier units. Suppose the 
last unit of capital to be represented by improved 
fencing or drainage ; this has evidently an impor- 
tant influence in increasing the efficiency of the 
earlier units of capital. 

There is a false separatism in the "dosing" 
illustration which ignores the organic unity in a 
business. No light is thrown either upon the 
theory or the practice of industry by treating one 
Factor of Production as a constant quantity and 
two as variables. 

§ 8. Thus we perceive that the fallacy of the 
"dosing" illustration consists in assigning a 
particular amount of productivity, and therefore 
of "product," to a particular dose. Professor 
Marshall, in treating the marginal dose of labour 



THE LAW OF BENT. 145 

in agriculture (^e.g. the last hoeing applied to a 
field), admits that "the return to that last dose 
cannot be separated from the others," but he adds 
" we ascribe to it all that part of the produce which 
we believe would not have been produced if the 
farmer had decided against the extra hoeing." 
(Bk. IV, Ch. Ill, par. 2.) 

Here we probe the heart of the " dosing " fallacy. 
It is claimed that the product of the last dose of 
labour is to be measured by the reduction in the 
aggregate product of the farm which would have 
attended the refusal to apply this last dose of 
labour. Now this is not justifiable. The with- 
drawal or refusal to apply this last dose of labour 
would have meant a diminished productivity, not 
only of the other units of labour, but of the units 
of capital and of land, and part of the result of 
this diminished productivity of other units is 
wrongly attributed to the last unit of labour. 

For let us see how this mode of measuring the 
productivity of the last increment applies. Let us 
suppose that a farm business is composed of 4 doses 
of labour, 6 doses of land, 3 doses of capital, this 
being the combination of the factors which is eco- 
nomically advantageous. Now in order to measure 
the productivity of the last dose of labour, let us 
remove it. The diminution of the total product 
may be 8%. This 8%, according to Marshall's 
method, we ascribe to the last dose of labour. If 
now, restoring this dose of labour, we withdrew 



146 THE ECONOMICS OF DISTRIBUTION. 

the last dose of capital, the reduction , of product 
might be 10%. This 10% is regarded as the 
product of the last dose of capital. Similarly, the 
withdrawal of the last dose of land might seem to 
reduce the product by 10%. What would be the 
effect of a simultaneous withdrawal of the last 
dose of each factor? According to Marshall's 
method, clearly 28%. But is this correct? Is it 
not likely that this simultaneous withdrawal might 
reduce the product not by 28%, but by (say) 18% ? 
According to Marshall, the whole of the 8% which 
disappears on the withdrawal of the last dose of 
labour is to be regarded as the product of that 
dose. But part of that 8% will consist in the re- 
duced productivity, not only of the other labour- 
doses, but of the doses of capital and land. The 
withdrawal of the last dose of labour may well be 
supposed to reduce in particular the utility of the 
last dose both of capital and of land, which factors 
are now in excess. Similarly, the withdrawal of 
the last dose of capital will affect the productivity 
of the last dose of labour and of land. The with- 
drawal of a dose of land will act in the same way 
upon the last doses of labour and capital. We 
should thus find that the simultaneous withdrawal 
of the last dose of the three factors would be con- 
siderably less than the 28% which Marshall's mode 
of measurement requires. For the withdrawal of 
the last labour-dose involves a nullification of a 
part of the productivity of the last unit of capital 



THE LAW OF BENT. 147 

and of land, and a part of the result thus attributed 
to labour is due to the diminished productivity of 
the other factors. Put the same experiment upon 
its broadest footing, and the overlapping fallacy 
becomes obvious. Take the labour, capital, and 
land as consisting of a single dose of each; now 
withdraw the dose of labour, and the whole service 
of capital and land disappears. Is the destruction 
of the whole product a right measure of the 
separate productivity of the labour-dose alone? 
Obviously not ; for if the dose of capital had been 
withdrawn instead, or the dose of land, the same 
effect would have ensued. 

§ 9. Causation may indeed be proved by what 
is called in logical text-books the Method of 
Difference, but the composition of causes pre- 
vents quantitative effect from being proved in 
this manner. The " dose " illustration is nothing 
else than a slightly more intricate example of the 
fallacy which confuses mechanical composition 
with organic cooperation. Where it is essential 
to productivity that land, capital, and labour 
shall all cooperate, it is impossible to assign to 
any one of them a product based on the supposi- 
tion of a separate productivity. Simila.rly, where 
there exists a necessary organic quantitative rela- 
tion between the factors, no separate product can 
be put down to any single dose of each. 

The root-fallacy of the " dose " illustration con- 
sists, then, in a false separation which ignores the 



148 THE ECONOMICS OF DISTRIBUTION. 

organic nature of production and the Law of Sub- 
stitution. The real determinant of price of a 
supply from the "cost" side will be found to 
reside in the comparative advantage of employing 
various combinations of the factors of production. 
In considering how a new increment of wheat 
supply, evoked by rising prices, will be produced, 
nothing is learnt by supposing it to be raised by 
applying a new unit of capital and labour to wheat 
land already in use. The real problem for con- 
sideration will be, " What changed proportion of 
the several factors will most easily turn out the 
increased supply?" Should more labour be ap- 
plied to the same land, or should more land be 
worked by the same labour, or should more capital 
be added, or what should be the conjunction of 
additional factors? 

The net result of this argument is that the 
application of the Law of Rent to the intensive 
cultivation of a single factor must be rejected as 
fallacious. 

The chief use of the " dose " illustration has 
been to support the theory that rent of land 
differs radically from all payments for uses of 
other requisites, in that it is a surplus which, 
being measured from a no-rent margin, does not 
form an element of price. Whereas it appeared 
that land at the extensive margin of cultivation 
for all higher uses paid a positive rent, it was 
sought to exclude this rent from price by arguing 



THE LAW OF BENT. 149 

that a portion of the supply might be raised upon 
an intensive margin, where no rent was paid even 
for supplies toward which no-rent land did not 
contribute. 

§ 10. The complete breakdown of this intensive 
margin throws us back once more upon the exten- 
sive margin for the sole legitimate application of 
the Law of Rent. 

We have already recognised what qualification 
of this, law is necessary. While the generally 
accepted statement of the law holds good in the 
case of the lowest or least remunerative use of 
land where the margin of cultivation pays no rent, 
it must be qualified in the case of land put to 
higher uses by the recognition of a series of higher 
margins of cultivation where a positive rent is 
paid for the worst land in use. - The differential 
rents for each particular piece of land will be 
measured from the no-rent margin only in the case 
of lands competing for the lowest use; the dif- 
ferential rents of lands for higher uses will be 
measured from a specific margin which pays a 
rent. While these differential rents will form no 
element in prices, the marginal rents will enter 
as an expense of production that is common to the 
whole supply. If the marginal hop land in use 
pays a rent of X2 an acre, a portion of that sum 
will be represented in the price of each pocket of 
hops. 



150 THE ECONOMICS OF DISTRIBUTION, 



Part II. 

§ 1. While there has been a growing tendency 
among recent economists to extend the term 
"rent" and the application of the Law of Rent 
to capital and to labour, as a rule this has been 
done tentatively, rather by way of analogy than 
as a recognition of the application of a common 
law. 

A true coordination of the factors of production 
which shall enable us to bring them all alike, in 
respect to the sale of their uses, under the general 
laws of price which are operative in the markets 
of commodities, requires that we first show how 
the law of rent in its extensive application is valid 
for each factor. 

The difficulties which confront us in this work 
chiefly arise from the adoption in economic treat- 
ment of a terminology which expresses loose popu- 
lar modes of regarding land, labour, and capital, 
and are mainly two. 

§ 2. The first difficulty arises from a radical 
difference in the common mode of represent- 
ing capital on the one hand, labour and land 
on the other. Whereas the two latter are re- 
garded in their concrete forms, the land in its 
acres, the labour-power in its daily or weekly out- 
put of energy, we commonly regard capital not in 



THE LAW OF BENT. 151 

the concrete shapes of plant, raw material, and 
goods, which are its serviceable forms for indus- 
try, but in its money value of so many <£100's. 
Whereas the payment to land and labour is pay- 
ment for the use of the concrete forms, payment 
for capital is payment for the use of so much of 
this abstract force measured by XlOO's. 

Now it is evident that no common law of price 
or value can be applied to the use of the three 
factors, unless we place them upon a common foot- 
ing. Either we must measure land and labour 
by their abstract or money measurement, capital- 
ising them and regarding rent and wages as 
payment for the use of so many XlOO's of this 
land-capital or labour-capital, or else when we 
speak of capital, we must speak of the concrete 
forms, of goods, plant, etc., which are used in 
industry. The actuality of a science of industry 
as distinguished from a science of finance requires, 
us to take the latter course, and to treat capital 
as consisting not in money but in concrete forms 
of wealth serviceable in production. 

The payment for the use of this concrete capital 
is interest. Since this latter term is by usage 
closely confined to the price, not of concrete capi- 
tal but of money capital, I should have preferred 
to adopt some other term. But none other is 
available excepting the still more slippery term 
"profit." I propose, therefore, to use the term 
" interest " for the payment of the use of concrete 



152 THE ECONOMICS OF DISTBIBUTIOlSf. 

capital, distinguishing it where necessary from 
financial interest by appending the term "real" 
to the former, " money " to the latter. 

It is, of course, evident that no coordination of 
capital with land by application of a law of rent 
is possible where capital takes the fluid form of 
money. For no "rents," either specific or individ- 
ual, could emerge from such uses of capital. It 
is, of course, incorrect to say that XlOO of capital 
in one employment earns 21% interest and another 
.£100, elsewhere employed, 5%. The extra 21% in 
what seems the better investment will either not 
be interest at all, but compensation for special 
risks, or it will by its very existence raise the 
capital from £100 to £200. For under present 
circumstances £100 of capital simply means so 
much capital as will bring £2. 10s. interest per 
annum to its owner. A proper business valuation 
of all capital is a valuation based upon the rate of 
interest. Ux hypothesis therefore, there can be 
only one true rate of interest for all this fluid 
abstract capital. Business habits often persist in 
speaking of capital as £100, when the increased 
annual value of the concrete forms represented has 
raised it to £200, so that one £100 share may be 
spoken of as paying 5%, but the market or selling 
value of course would be £200 and the true interest 
still 21%. 

No relation is possible between this capital and 
our other factors of production. We must deal 



THE LAW OF BENT. 153 

with the concrete forms which are thus valued. 
What is paid for their use is real interest. 

§ 3. When we have placed the factors of pro- 
duction upon the common concrete basis and agreed 
upon a term to describe the payment of the use of 
concrete capital, we are confronted with another 
difficulty. In measuring the value of land, a 
margin of cultivation is found to be of essential 
importance, and our examination of the law of 
rent has clearly indicated the need of substituting 
a joint-margin, composed of all the factors, for a 
margin of land only. But can we legitimately 
extend the conception of a margin of employment 
to capital and labour ? The initial difficulty takes 
this form. The worst land in cultivation for the 
lowest use (say grazing land) pays no rent; can 
we say that the worst placed capital will yield no 
profit and the worst labour in employment obtain 
no wage ? 

First, as to capital, whether it be true or not 
that the prospect of obtaining interest is a neces- 
sary motive to induce the creation of capital, it 
may distinctly be affirmed that interest is not 
necessary to secure the economic maintenance of 
forms of capital which have been brought into 
existence. What is needed for the continuous 
existence of forms of capital is a provision against 
wear and tear or depreciation; this charge upon 
gross profits is not interest, but is a deduction 
prior to payment of any interest. A business pay- 



154 THE ECONOMICS OF BISTBIBUTION. 

ing the minimum or merely nominal interest on 
its invested capital must, if it is properly con- 
ducted, have made provision for the maintenance 
of its plant and other forms of capital. Though 
some positive interest may be necessary to bring 
into use new forms of capital, it is not required 
to maintain old forms. This Walker has rightly 
recognised by insisting that the idea of no-rent 
land must be extended to no-profit businesses, and 
that the profits of better businesses may be meas- 
ured from this margin, as the rents of land are 
measured from a no-rent margin. 

Indeed, the more closely we look at the real 
supply of land and capital, the more artificial and 
the more unjustifiable appears the abrupt distinc- 
tion made by earlier economic theories. Mere 
land does not figure in supply. Land in its 
natural state — "prairie land" — is not really a 
factor of production. Its so-called "inherent 
and indestructible properties " have no value until 
the land is cleared and broken in, until some ex- 
penditure of labour is made upon it. In this 
sense there is a cost of producing a supply of land 
roughly corresponding to the cost of producing 
capital.^ Again, just as the continued existence 
of capital is secured by a constant provision 

1 Professor S. N. Patten lias shown {Premises of Political 
Economy) how this cost of production of land impairs the 
exactitude of the measurement of rent, because "the laws 
which regulate the bringing of new lands into cultivation, and 



THE LAW OF RENT. 155 

against depreciation, so the powers of land for 
most purposes are not indestructible, but demand 
a constant outlay. The abstraction of an eco- 
nomic land for which economic rent is paid is on 
the whole a singularly futile and confusing one. 
The worst capital and the worst land in economic 
use alike require a provision against wear and tear 
which is neither interest nor rent, while the in- 
terest and rent paid for their use is a merely 
nominal amount. 

§ 4. Now the case of labour seems different, 
but the difference arises merely from the adoption 
of inconsistent terminology. Whereas the fund 
for keeping forms of land and capital in existence 
is not termed rent or profit, the fund for keeping 
in economic existence repositories of labour-power 
is included under "wages." Thus it comes to 
pass that while the margin of land is no-rent land, 
the margin of capital no-interest capital, the mar- 
gin of labour is (say) 15s. labour. 

In order to clear the problem of price in distri- 
bution, it is essential to remove this anomaly. 
This 15s. wage does not in any sense correspond 
to interest or to rent. It is simply a wear-and- 
tear fund of labour, the expenditure necessary to 
replace the labour-power given out in a day's work, 

those according to which land will be withdrawn from cultiva- 
tion, are very different," affording "a large margin within which 
the price of produce may vary without a change in the quantity 
produced." 



156 THE ECONOMICS OF DISTRIBUTION, 

and to maintain the labouring population at their 
present numbers and at their present efficiency. 
The logical coordination of factors of production 
requires that this wear-and-tear or depreciation 
fund shall be distinguished from the additional 
payment which most labourers receive. It is 
wages above 15s. that correspond to positive rent 
or interest. If the term " wage " could be applied 
exclusively to the fund of maintenance, and some 
other term, such as "rent of labour," could be 
used to describe the higher payments, the coor- 
dination would be complete. 

We should then be able to apply with a fairly 
close degree of accuracy to all three the general 
statements which have been often reserved for 
land. 

§ 5. The fact that while land may be in exist- 
ence unutilised below the limit of cultivation, 
no forms of capital continuously exist below the 
no-profit limit, and no labour-power can be assumed 
to exist below the bare subsistence limit, does not 
in the least impair the setting. For just as land 
below the margin has only a potential economic 
existence, and can only be brought into supply by 
prices which give a positive rent to marginal land 
(lowering the margin of cultivation), so there 
must be deemed to be a potential fund of capital 
which will become actual, provided marginal capi- 
tal receives a positive interest, while any rise of 
payment to the marginal ISs. labour will increase 



THE LAW OF BENT. 157 

the supply of labour-power, either by raising the 
population rate or by improving the efficiency of 
labour, or by both. 

The causes which raise and lower the margin in 
all three cases will be similar in operation. The 
investigation of these causes, however, lies beyond 
our present inquiry. What payments for use 
of land, capital, labour, enter as elements into 
market-price of goods ? was our leading question. 
The coordination of land, capital, and labour 
leads us to conclude that just as rent of land 
need not form an element of cost or price in agri- 
cultural produce, some of which is raised on no- 
rent land, so interest need not figure in the cost 
or price of manufactured goods, some of which are 
produced by no-interest businesses, while similarly 
no cost of labour above the 15s. depreciation fund 
need enter into the price of commodities partly 
produced by marginal labourers. 

The same reasoning which shows that differen- 
tial rents of land need not enter price shows also 
that differential payments for capital and labour 
need not enter price. 

§ 6. Can a market-price then be composed of 
these depreciation or maintenance costs, without 
any element of positive rent or interest? 

It might be the case. If a part of the supply 
of wheat in a market was raised upon no-rent land 
by farmers who obtained no interest for their capi- 
tal and paid the minimum subsistence wage to 



158 THE ECONOMICS OF DISTRIBUTION. 

their labourers, such wheat raised under the great- 
est economic difficulty might regulate the market- 
price.^ 

But normally the last and most expensive por- 
tion of supply which rules the supply-price will 
not be produced under conditions which exclude 
all rent and all profit. Where a number of farmers 
working under widely different conditions, some 
in old, some in new countries, are contributing to 
the same wheat supply, it is more likely that the 
last portion of supply will be produced, partly on 
no-rent land, but paying an interest on capital and 
perhaps a wage far above 15s., partly by tenant- 
farmers paying rent but earning no interest on 
invested capital, partly by peasants paying rent 
or mortgage interest, but living on a bare sub- 
sistence wage. That is to say, the Law of Sub- 
stitution has always to be taken into account. 
The possibility of this choice or substitution of 
method shows the futility of arguments based on 
the single Ricardian application of the Law of 
Rent. If the history of the most expensive por- 
tion of a wheat supply could be closely traced, it 
might well be found that some quarters of it were 
raised on no-rent land, others on no-profit capital, 
others on subsistence wages ; but that an average 

1 This assumes that the marginal buyer is stronger than the 
marginal seller in the wheat market, and that therefore the 
price is pressed down to the lower limit so as to include no 
element of "forced gain." 



THE LAW OF RENT. 159 

quarter of this most expensive portion contained 
some element of rent or interest or higher wage, 
or all three. 

In other words, the Law of Substitution requires 
that in measurement of price we should substitute 
for the margin of cultivation of land a composite 
margin of employment of land, capital, and labour, 
at which is paid not necessarily the minimum 
rent, interest, and wage, but the lowest average 
combination of the three. Supply-price will be 
composed (under absolutely free competition) of 
these marginal expenses. 

Differential expenses of production above this 
composite limit, whether they be rent, interest, or 
wages, will not enter into the market-price of the 
supply. 



CHAPTER V. 

THE GRADING OF LABOUR AND CAPITAL. MARGI- 
NAL AND DIFFERENTIAL PAYMENTS. 

Part I. 

§ 1. Having indicated the changes in economic 
conceptions and terminology requisite to enable 
ns to establish the general coordination of the 
three factors of production and the application 
in each case of the idea of a measurement of price 
from a no-pay margin of cultivation or employ- 
ment, we may proceed to investigate with more 
particularity how far the marginal and differential 
grading admitted in the case of land is applicable 
to the other requisites, and how far the laws 
which govern the increase in supply of land for 
various markets operate in analogous fashion upon 
the supply of labour and capital. 

First, let us take labour. How far can we 
apply to labour the system of grading which we 
have employed in the case of land? 

The tendency of earlier economists, motived by 
theoretic considerations, was to impute too much 
fluidity to labour, too much choice of occupation 
to individual labourers, and (as an oft-quoted 

160 



GRADING OF LABOUR AND CAPITAL. 161 

passage of Adam Smith illustrates) to make in- 
sufficient allowance for differences of natural 
aptitude between man and man. The early theo- 
rists spoke too much of the labour-market, as 
if to all intents and purposes it were one market, 
as if each new-grown labourer had the whole field 
of e nployment open to his choice, as if the removal 
of certain legal barriers, such as the Law of Settle- 
ment or gild regulations, would enable labour, 
already specialised in some occupation, to leave 
that occupation easily and freely and seek another, 
where the wages or net advantages were higher. 
They failed to give adequate recognition to the 
fact that there exists not one but many labour- 
markets, marked off from one another not merely 
and not chiefly by locality, but by many racial, 
educational, industrial, and social demarcations. 
Between many of these labour-markets, even in 
England to-day, the passage is so narrow and so 
slow that there can hardly be said to exist an 
effective tendency to equalise the net advantages 
of the various employments. The wide differences 
of class wages, and even of local wages, for similar 
work, is ample testimony to this truth. 

How far the causes which prevent the forces 
making for equalisation of the net advantages of 
labour from being fully operative are to be spoken 
of as "natural," in the same sense that the laws 
which determine the contribution of land to dif- 
ferent supplies are natural, we need not here dis- 



162 THE ECONOMICS OF DISTRIBUTION. 

CUSS. What does concern us is the fact that, as a 
given kind of land in a given position is, partly 
from natural, partly from social-economic causes, 
confined to contributing toward a particular sup- 
ply, so a given kind of labourer is by natural and 
social-economic circumstances similarly limited 
in the application of his labour-power. It may be 
and is easier to alter some of the circumstances 
which determine the application of labour than in 
the case of land, though agricultural science and 
machinery of transport have done much to impart 
greater adaptability to land. But though the free- 
dom and adaptability of labour be greater than of 
land, if we take the existing supply of labour it 
must be regarded as subject, though in a weaker 
degree, to a gradation similar to that which we 
trace in land. 

§ 2. As we have land which is good for nothing 
but rough grazing, the worst of which yields a 
merely nominal rent, so we have a mass of low- 
skilled, low-untrained labour, which earns in its 
worst sorts a wage of bare physical subsistence. 
In fact, the lowest wage is less than a bare sub- 
sistence wage, if by the subsistence of the indi- 
vidual we mean his maintenance during the full 
span of his natural life, or even through the whole 
term of his effective working life. Slave-labour, 
under an intelligent profit-monger, may require 
provision to be made for a full working life, though 
even under slavery it may sometimes pay to use 



GRADING OF LABOUR AND CAPITAL. 163 

up a slave by intense toil during a shorter period. 
An effective system of poor law, which guaranteed 
an adequate support to able-bodied labour out of 
employment, upon terms not degrading to the 
applicants, might, by offering an alternative to 
ordinary wage-labour, secure economic conditions 
which would raise the minimum wage of low- 
skilled labour to a level of life subsistence. The 
actual minimum wage under normal modern in- 
dustrial conditions must be taken to be such a 
Avage as enables a worker to go on working until 
he has provided through his family a substitute. 
Of course if there is an increasing demand for 
labour expected in the future, the minimum wage 
must be such as to evoke more than one substitute, 
i,e, to call for an increase of working population 
in this lowest grade. 

This dependence of growth of working popu- 
lation upon wages is, of course, modified by the 
operation of poor laws, private charity, and pub- 
lic support of various kinds. It will therefore be 
the case that population may grow at a somewhat 
faster rate than would be brought about by the 
play of wage-forces alone. ^ 

1 Early economists overstated the directness and the exacti- 
tude of the influence of purely economic forces (wages) upon 
the supply of labour. The tendency at present is to under- 
estimate it. In particular it has been pointed out that a higher 
standard of wages in a country like England does not cause a 
corresponding growth of the labouring population. On this 
point three things may be said. First, it is often forgotten that 



164 THE ECONOMICS OF BI8TBIBUTI0N. 

I have spoken of a certain minimum wage as 
analogous to a depreciation or wear-and-tear fund 
of capital. This sum, varying somewhat, of 
course, with the various kinds of labour, as the 
depreciation fund varies for different forms of 
capital, I estimated at 15s. In a progressive in- 
dustrial community, where an increase of labouring 
population with a sufficient margin of unemployed 
to be utilised in periods of booming trade was re- 
quired, the minimum wage, or cost of subsistence, 
must of course be more than this 15s. required to 
keep a stable population in that grade ; and this 
additional wage (say 3s.) required to raise the 
population must be regarded as analogous to a 
minimum interest required to call forth additional 
capital. 

§ 3. If, then, in a community the lowest grade 
of labour was paid 18s. for its least efficient mem- 
bers, we should find rising above this grade various 

one important effect of a higher standard of comfort is that a 
larger proportion of children grow to maturity. Secondly, with 
a higher standard of comfort, the effective supply of labour is 
increased, not only by the number of labourers, but also by 
the quantity of labour-power each labourer represents, i.e. the 
average working life is longer, and is capable of yielding in a 
given time a larger quantity of efficient labour-power. Lastly, 
the check which forethought and preventive methods have 
placed upon the growth of population in the more intelligent 
classes plays yet a very small part in the labour-markets of the 
world. 

It is still true that rising wages evoke an increased supply of 
labour-power. 



GRADING OF LABOUR AND CAPITAL. 165 

other grades paid upon higher scales. Speaking 
generally, we should be able to classify the workers 
by a sort of stratification beginning with the low- 
skilled worker at the bottom, proceeding through 
several strata of factory hands, the building trades, 
skilled mechanics, into the salaried, professional, 
and managing classes. The rate of payment will 
be higher, as we rise, for the least efficient labour 
actually employed at the various levels. In other 
words, we should find a number of class minimum 
wages analogous to the different specific marginal 
rents which mark off the margin of pasture land, 
wheat land, hop land, city lands, etc. This strati- 
fication of labour is now commonly admitted, 
though to some economic thinkers it seemed novel 
when Cairnes gave his vigorous indorsement to 
the idea. " What we find in effect is, not a whole 
population competing indiscriminately for all oc- 
cupations, but a series of industrial layers super- 
imposed on one another, within each of which the 
various candidates for employment possess a real 
and effective power of selection, while those occu- 
pying the several strata are, for all purposes of 
effective competition, practically isolated from 
each other. "1 It is not necessary to insist too 
strictly upon this "practical isolation." Indi- 
viduals can pass from one stratum to another; 
new labour has some considerable choice. It is 
sufficient to recognise that at any given time we 

1 The Slave Power, p. 73. 



166 TRE ECONOMICS OF BI8TBIBUTI0N, 

do find a gradation of labour with different rates 
of wage for the least efficient members of each 
grade. Again, within each group will be found 
a number of different qualities of labour earning 
different rates of remuneration. These, too, we 
may measure from the position of " the determinant 
labourer " of each class. 

The same correction of the position assigned to 
the "marginal labourer " is required as in the case 
of marginal cultivation of land. In the labour- 
market what is really sold is not labour-time, but 
units of labour-power; the determinant labourer, 
therefore, need not be the least efficient labourer, 
but may be a superior labourer, who is " determi- 
nant " in the sense that he is only just induced by 
the class wage paid to contribute to supply. The 
least efficient labourer might have no alternative 
employment, and might be willing, therefore, to 
accept a lower wage, if he were obliged; but a 
superior labourer of the class might have an alter- 
native employment so that the wage must be such 
as to induce him to apply his labour-power to this 
use. It is the economic position of this "deter- 
minant " labourer which from the cost side helps to 
determine the value of a unit of labour-power and 
so to fix not merely the wage he himself receives, 
but also the wage of the various other labourers 
in his labour-market, whose actual wages depend 
upon the number of units of this labour-power 
they can give out. Thus the efficiency of the 



GRADING OF LABOUR AND CAPITAL. 167 

least efficient labourer in the class has no direct 
determining power over the class wages, as is 
sometimes suggested; it is the economic power of 
the "determinant labourer" which fixes the pay 
of the least efficient labourer. 

The system of piece wages makes this easily in- 
telligible. The least efficient worker in a trade 
may be earning by piece wages 20s. a week; this 
may be regarded as a marginal wage in this class 
of labour, differential wages of superior individual 
skill rising above it. The " determinant " labourer 
may be a superior worker earning 30s., 10s. being 
a wage of individual ability within the class. 
This labourer must receive 30s. in order that he 
may do this kind of work in preference to some 
other. He is the final seller in this labour-market, 
whose action determines on the selling side the 
price for the whole market. 

But though this 30s. labourer may be accounted 
the determinant labourer, it does not follow that 
the whole of the 30s. is necessary to divert him 
from his alternative employment. Just as in our 
grading of land we found that in addition to the 
marginal and differential rents there might be a 
rent of sheer "scarcity," where demand pressed 
upon a short supply, so here it might be that the 
alternative employment open to the " determinant " 
labourer would yield him a wage of only 27s. ; but 
although any wage above 27s. would secure his 
contribution to the supply of labour under inves- 



168 THE ECONOMICS OF DISTBIBUTION, 

tigation, he is able in his capacity of determinant 
seller to exact 30s., including a scarcity wage of 
3s., which last sum corresponds to the forced gain 
that accrued to the stronger member of the final 
pair of bargainers in our horse-market. 

The term "rent of ability," frequently applied 
to the higher wages earned by a more competent 
worker, shows that the analogy of classification of 
land and labour has made some considerable way. 
The margin in both cases is not rigid, but is con- 
tinually shifting, faster, no doubt, in labour than 
in land, but the same economic terminology ap- 
plies. 

§ 4. Moreover, the price of labour is seen to 
enter into the price of commodities upon precisely 
similar terms to the rent of land, when we exclude 
the bare subsistence wage, as we exclude the 
depreciation fund for land and capital. The 15s. 
subsistence should rightly be regarded as a first 
mortgage upon the product, along with the corre- 
sponding provision of maintenance for capital and 
land. 

Beyond that necessary provision no element of 
true wage (or labour profit) enters into the price 
of the product of the lowest labour. But the 
minimum wage of a Lancashire weaver (say 21s.) 
will yield a marginal rent measured from 15s., 
amounting to 6s. This marginal or " class " wage 
will enter into price. If a mason's minimum wage 
be 30s., the excess of this sum over 15s. will simi- 



PAYMENTS. 169 

larly enter into price. But the individual wage 
earned by a more skilful weaver or mason will 
form no element in expenses of production, and 
will not enter into price. Modern economists 
often admit that only the wage of the least efficient 
labour counts in price of the product, but not clearly 
recognising the difference between the " determi- 
nant " labourer and the "marginal " labourer, they 
are often disposed to impute to the latter a determi- 
nant influence which really belongs to the former. 
All that we have to add is that there are a num- 
ber of different marginal labourers for different 
labour-markets. There are marginal rents of 
labour (sometimes containing also a rent of scarc- 
ity) which are represented in "price," and there 
are differential rents which are not represented. 



Part II. 

§ 5. How far may capital be submitted to a 
similar process of marginal and differential grad- 
ing ? How far can we distinguish different classes 
of capital more or less profitable, and individual 
differences within a class ? 

How far does the alleged " fluidity of capital, " 
making for a single supply and a common level of 
remuneration for its services, impugn this theory 
of stratification ? 

We have seen that this belief in an equality of 



170 THE ECONOMICS OF DISTRIBUTION. 

remuneration for capital arises partly from the fact 
that capital is commonly reduced to terms of its 
money- value — a process which assumes equality 
of remuneration as its starting-point. When we 
turn to the actual forms of concrete capital, we 
certainly find wide variation of remuneration. 
But can we regard these differences as analogous 
to the specific and differential rents or earnings of 
land and labour ? It has been necessary to select 
the term " interest " to describe the remuneration 
of capital, but capital cannot earn interest of itself 
or even in conjunction with land and labour. 
Capital, in order to function in industry, must be 
handled by a business man, and it is always pos- 
sible to claim that a part at least of the net gain, 
after all other deductions commonly named, is due 
to skill or economy of handling. ^ The extra gain 
which comes from handling a large quantity of 
capital, as compared with a small quantity, even 
though this handling requires no more skill or 
effort, is commonly assigned, not as payment for 
use of capital, but as wages of management. 

But though in practice it is extremely difficult, 
perhaps impossible, to sever this interest, or pure 

1 This claim is, of course, not confined to the remuneration 
of capital ; the productiveness of land and labour is also 
dependent upon skilful handling, and it is possible to claim 
as true earnings of management part of the results of in- 
creased productiveness of land and labour. In the case of 
labour, Mr, Mallock has pressed this claim, asserting that high 
wages really include earnings of management. 



PAYMENTS. 171 

payment for use of capital, from other elements, 
an orderly scheme of economic theory requires us 
to do so. Now my suggestion is that if this sever- 
ance were made, interest would certainly be shown 
not to be equal for the use of all equal- quantities 
of capital. The different concrete shapes, which 
equal quantities of " saving " take, will most likely 
differ as widely in the profits they obtain for their 
owners, as one 10-acre field differs in rent from 
another 10-acre field, or one labourer differs from 
another labourer in wages. 

There is no force in operation which would 
guarantee that the saving which went into a 
steam-engine would earn for its owner an "in- 
terest" identical in size with that for the same 
quantity of saving which went into a shop-build- 
ing, or that one railway carriage is as remunerative 
as another railway carriage of equal quality. 

In other words, some employments of capital 
are more remunerative than others, and, within a 
given employment, some pieces of capital are more 
remunerative than others. 

If these differences were due to the difference 
of skill with which they were handled, they must 
of course not be reckoned as differences of interest 
in our sense. 

But if there exist certain conditions which pre- 
vent absolute fluidity of investment, which limit 
and mark off certain fields of investment for cer- 
tain owners of capital, and which give within a 



172 THE ECONOMICS OF DISTBIBUTION, 

field of investment special advantages to some 
owners as compared to others, it will seem legiti- 
mate to grade capital, as we grade land and labour, 
into a number of practically non-competing groups 
with differential gains within each group. 

§ 6. If it were open to all savers to have full, 
equal knowledge of every field of investment, and 
to have equal access to all fields, real interest, like 
money interest, would be uniform. But is this 
the case? 

General Walker has explicitly denied the alle- 
gation that different classes of investment differ 
in the rates of profit they yield, and even suggests 
that the differences of " interests " derived from 
different pieces of capital in the same class are not 
true interest. 

"That different bodies of capital do, in fact, 
yield different rates of interest is too evident to 
require proof; but this is due to many causes, 
which are irrespective of the nature of the capital 
itself."! 

General Walker enumerates three chief causes 
for these differing rates of remuneration; (a) Dif- 
ference in risk; (yS) miscalculation on the one 
hand, or fortunate speculation on the other; 
(7) disguised rent, disguised profits, or commer- 
cial good-will. 

Now, in the first place, it may be observed that 
a and /3 are not different causes, but two ways of 

1 Quarterly Journal of Economics^ July, 1891. 



PAYMENTS. 173 

looking at the same cause. A "risky" invest- 
ment is nothing else than an investment prone to 
"miscalculation," or in which success is in large 
measure the result of fortunate speculation ; a is 
the objective, yS the subjective, view of the same 
factor. 

But does this fact meet the allegation that 
different classes of investment differ in remunera- 
tiveness? Not at all. It only helps to explain 
why, within the same class of investment, the rate 
of interest upon some pieces of capital is higher 
than for others. The allegation that the nature 
of the capital has something to do with determin- 
ing the rate of interest means, of course, that in 
certain employments of capital there is a higher 
average rate of interest than in others. It is cer- 
tainly strange that General Walker should have 
failed to perceive that while his last cause (7) 
refers to classes of investment, (a) and (/3) refer 
only to individual investments within a class. 

Turning to (7) it will be at once admitted that 
disguised rent is a vera causa in determining what 
seems to be the higher interest for certain classes 
of investment. There are several ways in which 
rent is liable to figure as interest. 

Certain classes of business yield a higher rate 
of interest because the capital invested in them is 
protected from free and effective competition by 
association with monopoly of land. Land-values 
and capital-values are not always clearly distin- 



174 THE ECONOMICS OF DISTRIBUTION. 

guisliable. If the term "capital" is confined to 
its only logical use, to express production-goods 
and plant, we shall see that those engaged in the 
early steps of converting the raw material of the 
soil into early forms of capital are, in part land- 
owners, in part capitalists. The businesses of ex- 
tracting ore, of raising cattle, and the whole 
industry of agriculture are businesses in which 
land-values are not easily distinguishable from 
capital-values or rent from interest. Even where 
these operations are conducted on rented lands, 
the custom of leasing does not enable us to clearly 
or precisely determine whether in a given year 
some profit has not been returned as economic 
rent and vice versa. 

Where the owners of a business are also the 
owners of ground upon which it is conducted, a 
growing element of land-value will often show 
itself as a rise in interest. No consideration of 
the value of surrounding land can wholly guard 
against this confusion. If this is the case in 
ordinary businesses, where the use of land is for 
machinery and other plant, warehouses, etc., much 
more is it the case where the elements of the soil 
or spatial qualities play a direct part in the busi- 
ness. Such a case is that of breweries. The 
interest paid on capital engaged in gas or water- 
works, or tramcars, is complicated, as we shall see 
presently, by another monopoly influence; but it 
is rarely possible to separate, in the dividends 



PAYMENTS. 175 

paid to shareholders, the elements of economic 
rent and interest. Most important is the part 
placed by land limitation in transport industries. 
Professor Marshall is of opinion that "the domi- 
nant economic fact of our age is the development, 
not of the manufacturing, but of the transport 
industries."^ Now the transport industries, so 
far as they are left in private hands, require a 
monopoly of earth surface. Between o^nj two 
points of population there is only one shortest 
way. Whether it be a railroad, a telegraph road, 
or a tram line, the most advantageous route can 
only be in the possession of one company at the 
same time. Most transport companies obtain a 
more or less permanent possession of the most 
advantageous route, supporting this natural mo- 
nopoly, in many cases, by a state privilege pro- 
tecting them against competition, even beyond the 
limits of their natural monopoly. Here, again, 
it is impossible to say how far the higher rate of 
interest paid by a successful railway or tramcar 
company is really an economic rent of land, and 
bow far land monopoly has assisted certain other 
monopoly powers inherent in certain uses of 
capital. 

If it be the case that more and more capital and 
labour will be engaged in distributive than in 
extractive or manufacturing processes, the impor- 
tance of this close alliance of land ownership with 

1 Principles of Economics, 2d ed. , p. 724. 



176 THE ECONOMICS OF BISTBIBUTION. 

capitalism is a growing one. Where the effect 
of land ownership is to restrict the competition of 
capital in any given employment, it may fairly be 
urged that any abnormal interest due to the re- 
stricted competition or the power of capital is 
ultimately traceable to land-power. But inasmuch 
as this "specific rent" appears as interest and 
cannot conveniently be separated from genuine 
interest, it is rightly regarded as an element in 
the specific differences of forms of investment. 

By "disguised profits," General Walker may 
mean one of two things. It may signify the 
higher interest paid upon certain capital owing to 
superior skill of management. In this case "rent 
of ability " figures as interest. The skill of an 
able manager who is paid by a fixed salary may 
for a time secure higher dividends for the share- 
holder, just as the mismanagement of an incom- 
petent manager may lower the dividends. But, 
unless it can be shown that a particular class of 
business, by its very nature, presents special 
attractions to managing ability, this form of dis- 
guised profit is an individual affair and cannot be 
placed on the same footing with disguised rent 
as an explanation of specific differences in re- 
munerativeness of capital. 

But the term " disguised profits " may cover 
a real form of class gain. Certain classes of 
investment are, in fact, restricted to capital in 
the possession of men who enjoy certain "class" 



PAYMENTS. 177 

advantages of position, education, or trade con- 
nection. It is admittedly difficult for a poor 
man who has saved a little money to find a 
safe or remunerative investment. The spread 
of education and improved methods of coopera- 
tion may effect some change, but it is at pres- 
ent true that capital invested by persons of means, 
position, and intelligence is, on the average, 
more remunerative than the capital invested by the 
poorer and more ignorant. The restricted access 
to knowledge and skill, where the use of capital 
requires special skill, secures for certain classes a 
practical monopoly of certain forms of investment. 
Lawyers and bankers, it is generally held, possess 
certain opportunities of profitable investment not 
open to ordinary persons. 

Any higher rate of interest secured by capital 
invested under these conditions may, of course, 
be regarded as a "marginal rent" due to special 
advantages of education or opportunities, and, as 
such, classed under the head of profit rather than 
of interest. The vagueness still attaching to the 
word "profit" as an economic term favours this 
interpretation. But if, on the other hand, we 
regard limitation of investment as a quality attach- 
ing to capital, the " marginal rent " of such form 
of capital may not unfairly be claimed as a "rent " 
of capital. 

While the restricted access to land or oppor- 
tunity serves to explain the higher rate of real in- 



178 THE ECONOMICS OF DISTRIBUTION. 

terest for capital in certain forms of investment, 
there are other causes, political, social, and eco- 
nomic, which endow certain forms of capital with 
a remunerativeness which is rightly regarded as 
attaching to the nature of the species of invest- 
ment. 

First: privileges conferred or restrictions im- 
posed by national or local authority limit the 
freedom of competition in certain employment of 
capital, i.e. endow certain capital with a power 
of monopoly. 

Sometimes a charter gives to a particular body 
of capitalists an absolute monopoly, with or with- 
out restrictions as to maximum price of the 
commodity they provide. No direct competition 
touches the monopoly of gas or waterworks estab- 
lished in a town and secured by charter for a given 
body of capitalists. In addition to the maximum 
price and to a maximum rate of interest, some- 
times imposed but commonly evaded by watering 
the stock or other devices, there are two economic 
limitations to such monopolies. The first is that 
furnished by the Law of Substitution, the ability 
of the consumer to dispense with the article of 
monopoly and to use some other article in its stead. 
If the price of gas were raised beyond a certain 
point, the enlarged use of electricity, of oil, can- 
dles, or other illuminants would check the rise. 
Hence the monopoly of a water company is a 
stronger one; for it would be more difficult to 



PAYMENTS. 179 

obtain another supply or to substitute some other 
commodity than in the case of gas. 

The second limit depends upon the complex 
relations existing between supply-price and de- 
mand in the particular case. Every rise in the 
price of gas above the competitive price of two 
rival companies would bring a certain shrinkage 
of demand. Hence it arises that the highest price 
does not necessarily yield the largest net profit. 
Generally, it may be stated that the most profit- 
able price is high in proportion as the article of 
monopoly is indispensable. 

Since neither of these qualifying conditions of 
"monopoly" is of the nature of that competition 
which tends to reduce to a common level ordinary 
classes of investment, we have clearly a specific 
interest which enables us to grade these protected 
classes of investment according to the various 
degrees of monopoly pressure which they possess. 

The power vested in owners of valuable patents, 
and even in those who, without legal protection, 
have exclusive control of any market or of the sale 
of any class of goods, is of a similar economic 
character, and enables the capital invested in such 
businesses to get a specific interest. 

Protective tariffs, or bounties, in so far as they 
succeed in restricting or limiting freedom of com- 
petition in certain employments of capital, help 
to maintain a special rate of interest in those 
businesses in which new capital cannot easily 



180 THE ECONOMICS OF BISTBIBUTION. 

enter so as to share the advantage of the state- 
granted monopoly. The only economic reason 
which can induce any class of manufacturers to 
seek protection for the goods they make, is the 
desire to reap the marginal interest of capital * 
which this protection secures. 

But the most important cause of marginal rents 
(specific interests) of capital resides in the nature 
of capital itself as a factor of production in cer- 
tain classes of business, independently of all 
social or political privileges or restrictions. 

In whatever branches of industry the economic 
Law of Increasing Returns prevails, that is to say, 
where capital and labour are most advantageously 
employed in large quantities, the capital invested 
may obtain a special rate of interest. It is un- 
necessary to enumerate the particular economies 
which in most manufacturing and mercantile busi- 
nesses give a net economic advantage to the big 
capital. But it should be kept in mind that these 
economies do not of themselves furnish any guar- 
antee of a higher rate of interest. They operate 
indirectly, by reducing the number of competitors 
and abating the pressure of competition. If the 
competition between the smaller number of large 
capitals was as keen and constant as between the 
larger number of small capitals invested in other 
businesses, the advantage in higher interest which 
these economies might seem to justify would 
entirely disappear. But the size of the capitals 



PAYMENTS. 181 

engaged prevents the competition from being so 
keen and so constant. At certain periods, it is 
true, competition may be as effective between two 
or three competitors as between two or three 
thousand. But where the competition is between 
few, it is, on the average, less persistently effec- 
tive. The different competitors exercise each a 
certain practical monopoly over certain districts 
or in certain lines of goods. Even where the com- 
petition with a big competitor is keen, its keen- 
ness is abated when prices are driven down so low 
as to yield only a common rate of interest. Above 
all, the opportunities of suspending competition, 
or of forming agreements for maintaining prices, 
limiting supply, or keeping down wages, are 
vastly greater in a trade given over to a few large 
capitals than where there are many small compet- 
ing capitals. The advantage given to capital in 
controlling the price of labour in employments 
most subject to the Law of Increasing Returns, 
where a small number of large capitals is con- 
stantly narrowing to the apex of a Trust, is most 
significant. Certain disadvantages common to 
most forms of labour in bargaining with capital 
are greatly enhanced where the competition of 
capitals is restricted to a few large masters. 
"Labour," writes Professor Marshall, "is often 
sold under special disadvantages, arising from the 
closely connected group of facts, that labour-power 
is 'perishable,' that the sellers of it are commonly 



182 THE ECONOMICS OF JDISTBIBUTION , 

poor and have no reserve fund, and that they can- 
not easily withhold it from the market. " ^ A posi- 
tion of vantage in bargaining with labour is one 
of the chief economic advantages in those indus- 
tries where the action of the Law of Increasing 
Returns has thrown the business into the hands 
of a few large firms. 

The net economic advantages which large capi- 
tals enjoy in industries where the Law of Increas- 
ing Returns is more powerfully operative than the 
Law of Diminishing Returns, secure to those capi- 
tals a position of limited monopoly, i.e. a monopoly 
limited by the consideration that a very high price 
would bring new competitors into the market. 
The gain which this limited monopoly secures is 
a "specific marginal interest." Industries where 
the monopoly is very limited draw a small specific 
i,nterest; industries where the monopoly is of a 
prime necessary of life, a substitute for which 
cannot easily be found, where a supply from a 
more distant market cannot easily be procured, 
where new captial cannot easily be applied to the 
industry, and where a considerable reduction of 
consumption is impossible, are in a position to 
derive a very high marginal interest. The Law 
of Increasing Returns forms the basis of economic 
grading of capital, just as the Law of Diminishing 
Returns forms the basis of grading in land-values. 
According to the varying pressure of this law in 

1 Principles of Economics^ Vol. I, p, 600 (2d ed.). 



PAYMENTS. 183 

different industries, the capital engaged therein 
enjoys a greater or less degree of monopoly power 
and draws a greater or less specific interest, in 
addition to the minimum interest socially required 
to induce the "saving" of capital. Where the 
economies of large-scale production are biggest, 
the tendency is to bring about an absolute or 
limited suspension of competition among hitherto 
competing capitals and to secure the "saving of 
friction " which attends the establishment of a 
ring or trust, where the present action of com- 
petition is reduced to a minimum. 

The monopoly of a strong trust differs only in 
degree, and not in kind, from the monopoly held, 
in different proportions, by all large forms of capi- 
tal protected against the competition of smaller 
intruders by the advantage conferred by the opera- 
tion of the Law of Increasing Returns. Of course 
there are doubtless industries where this Law of 
Increasing Returns ceases to be operative beyond 
a certain point, or more strictly speaking, where 
a decline in efficiency of management in a business 
of ever growing magnitude would outweigh the 
economies of a larger capital. ^ 

But it is safe to say that in any industry within 
the limits of the dominant operation of this Law 

1 Professor Marshall, who has worked out the operation of 
the Law of Increasing Returns and its limitations, considers its 
operation from the standpoint of individual firms, not of classes 
of investment. Bk. V, Ch. XI. 



184 THE ECONOMICS OF DISTRIBUTION. 

of Increasing Returns, there is an element of eco- 
nomic monopoly yielding a specific marginal rent. 

We are now able to recognise that, in economic 
theory at any rate, pieces of capital may be graded, 
just as pieces of land may be graded, according to 
their capacity of contributing to various supplies. 

There are several reasons which explain why 
this conclusion, which seems to follow so clearly 
from the admitted operation of the Law of Increas- 
ing Returns, should have so generally escaped 
acknowledgment. 

The great variety in forms of capital, its superior 
mobility as compared with land, its more rapid and 
intricate fluctuations of value, have materially con- 
tributed to conceal the gradation of capital. More 
important still is the fact that, since capital is meas- 
ured in terms of money, actual forms of capital 
are being continually revalued according to their 
remunerativeness. This "marginal rent "of mo- 
nopoly is constantly absorbed into the higher valu- 
ation which is given to the capital. The outside 
investor of XlOO gets no more interest by purchas- 
ing a share in a business reaping a high marginal 
rent than in a business enjoying no such rent. 

Lastly, the confused and illogical connotation 
given to the term "capital" by most English and 
American economists has helped to obscure the 
truth. 1 

1 Professor Bohm-Bawerk expresses a natural astonishment 
that so many English economists, differing so widely in their 



PAYMENTS. 185 

But, in addition to these causes which operate 
to hide the nature of capital-values, there are 
special reasons why marginal gains of capital have 
escaped recognition among many who have clearly 
grasped the conception of scarcity-value in land 
and in natural ability. 

First, there is the difficulty, to which attention 
has been already called, of accurately distinguish- 
ing interest of capital from other special gains 
with which it coalesces. The interests of capital 
drawn by the firms of Bass or Guinness are not 
separable from the gains arising from certain forms 
of land and water monopoly which form part of 
the business "capital" of these companies. It is 
not possible to say precisely how much of the 
monopoly rent which falls to Messrs. Carnegie is 
due to monopoly of land, how much to the legal 
protection of the tariff, and how much to the 
competitive advantages of a large capital over a 
small one in the steel rail industry. The capital 
invested in a chemist's shop probably yields a 
higher average interest than that employed in a 
tobacconist's. It is not possible to say how much 
of this advantage is due to the fact that it is 
cheaper to stock a tobacconist's shop than a 
chemist's, and that competition is, therefore, 
keener among the former, and how much of the 

definitions of capital, should agree in the inconsistency of 
including under capital consumption goods in the possession of 
labourers. {Positive Theory of Capital^ p. 67.) 



186 THE ECONOMICS OF DISTRIBUTION. 

advantage should be regarded as rent of ability or 
as rent of a legal monopoly, because any one may 
purchase a license to sell tobacco, while certain 
personal qualifications are required in a chemist. 

This difficulty involved in a separate estimate 
of capital is one of the chief reasons why the 
specific marginal interests of capital have escaped 
notice, and have generally been attributed to land, 
legal monopoly, or natural ability, with the rents 
of which they often coalesce. 

Another reason why they escape notice is that 
they are hidden generally by the greater promi- 
nence of individual rents. Marginal rent is only 
an approximately accurate term, selected for cer- 
tain purposes of convenience. If we apply to 
different employments of capital the Law of In- 
creasing Returns, we see that it acts with varying 
force in various employments. It thus gives rise 
to a number of marginal rents of capital. But, 
within each species of employment, it also applies 
with varying force to various sizes of business. 

If any evidence were required of the existence 
of marginal and individual interest of capital, it 
would be afforded by the persistent attempt which 
is constantly made by a number of owners of small 
capitals to obtain these special gains by massing 
their small capitals into a single large one. The 
starting of new joint-stock banks is strong evi- 
dence of a belief in the inherent advantage of a 
large capital over a small. One result of success- 



PAYMENTS. 187 

ful cooperation of a number of small capitals, in 
employments once monopolised by a few rich 
owners of large private capitals, is, of course, to 
introduce that very element of keen competition, 
the absence of which was the basis of the monopoly 
rent. Where cooperative small capitals can com- 
pete on equal terms with large private capitals, 
marginal and differential rents of capital alike 
tend to disappear. So far, however, as it is true 
that a particular class of business requires a capital 
of a given size in order that it may be conducted 
with an ordinary chance of success, this limitation 
is able to secure a marginal rent for the capital 
employed in it with average business ability, as 
within that business the advantage which a larger 
capital has over a smaller constitutes a basis of 
individual rent. 

One further objection to the proposed grading 
of capital requires an answer. It will doubtless 
be urged that the differences upon which it is sug- 
gested capital should be graded are not differences 
inherent in the nature of capital, but rather differ- 
ences in the conditions of its employment. The 
answer is that the conditions under which any 
given piece of capital are employed, the size in 
which it is massed, the place it occupies in the 
industrial machine, belong to the nature of this 
material qua capital just as the element of relative 
position belongs to the nature of land-values. 
The value of particular forms of capital, of so 



188 THE ECONOMICS OF DISTRIBUTION. 

many engines, or pianos, or sovereigns, depends 
in large measure upon where they are situated, 
and in what quantities they are collected; accord- 
ing as they are more or less advantageously situ- 
ated in these respects, they help to earn a higher 
or lower specific interest. 

The other form this same objection takes, that 
capital is inseparable from the guiding mind of 
its employer, and that differences in rates of re- 
muneration are entirely attributable to skill or 
good fortune of the entrepreneur^ needs no further 
discussion. It has been already admitted that an 
element of disguised profit is liable to figure as 
interest, just as it may also figure as rent of land 
when a rapacious landlord rack-rents the tenant of 
a well-conducted shop. The intelligent activity 
of man is requisite to the employment of capital 
just as it is to the employment of land and labour- 
power, if they are to be put to serviceable use 
so as to yield a return in value. But the skill of 
management is no more the cause of the rents of 
capital which we are tracing than of the specific 
rents of land. 

In reckoning capital-values just as in reckon- 
ing land-values, we are entitled to assume that 
average human intelligence is at work in their 
employment. It is important to keep this in 
mind, for it furnishes a complete refutation to 
a view which is often held respecting the high 
rates of interest in certain classes of investments. 



PAYMENTS, 189 

Where successful firms obtain very high interest, 
it is alleged that these high returns are balanced 
by the low-interest, or the no-interest, or the 
minus-interest, i.e. failure, of less successful firms. 
In kinds of employment of capital where the prizes 
are high the blanks are more numerous. 

Now it is only natural that the high monopoly 
rents obtained by successful firms should tempt 
foolish owners of capital to engage in rash specu- 
lation with the view of sharing these monopoly 
rents. But, in reckoning the specific rent or the 
total interest of capital employed in such an in- 
dustry as gold-mining, we have no right to count 
in the sums which greenhorns hand over to the 
floaters of bogus companies. We do not assess 
good agricultural land at a minus rent because 
many a fool has squandered his money in bad 
farming. The specific rent of a given class of 
land is what it will pay in the hands of a tenant 
of average skill ; so the specific rent of gold-mining 
or any other form of investment presupposes the ap- 
plication of ordinary business intelligence. When 
this is borne in mind, it will be seen that the rates 
of interest, set down in statistical reports of the 
conditions of railways, banking, mining, and other 
industries, generally conceal a portion or the whole 
of the specific rent, by including in the capital 
whose interest is averaged a great deal of capital 
not applied under the above-named condition. If 
we are to exclude, as is admittedly right, the ele- 



190 THE ECONOMICS OF DISTRIBUTION. 

ment of disguised profit, due to special skill of 
management, we must also exclude the element 
of disguised loss, due to the folly of ignorant in- 
vestors and incompetency of management. 

§ 7. The greater facility of transferring forms 
of capital from place to place, the fact that a large 
proportion even of " fixed " capital can be trans- 
ferred, though at a loss, from one employment to 
another, the large field of choice which an average 
saver has for the storage of his saving power in 
forms of capital, — these and other considerations 
perhaps impart a larger fluidity and freedom of 
competition to capital than to land, or even than 
to labour. 

But none the less, the idea of practically 
non-competing groups with differential positions 
within each group seems conveniently applicable 
to the supply of all three factors of production. 
In none of the three cases must we regard the 
specific and individual status as a rigid one ; there 
is a constant shifting of marginal and differential 
values. But at an}^ given time only a certain 
quantity of land, of capital, of labour, is avail- 
able for contribution to a class of supply: the 
worst of this land may pay a rent, and this rent 
will enter into price ; the worst of the labour may 
earn a class wage above the unskilled labour- 
ers, this wage will enter into price; the least 
favourably situated mill or mine contributing to 
the supply may be able to earn an interest above 



PA YMENTS. 191 

the minimum, this interest will enter into 
price. 

The individual superiorities enjoyed by special 
pieces of land, labour, capital, though they pro- 
cure for their owners special rates of rent, wages, 
and interest, will not enter into price. 

Following this analysis, if we took the market- 
price of a supply of finished manufactured goods, 
we should find that price representing a complex 
of a large variety of marginal money-costs ; these 
marginal costs would be the marginal rents of the 
land, capital, and labour required at each stage in 
the different processes of production. At some 
stages no-rent land might be used; at other stages 
the worst land in use would be rented; at other 
stages no-interest businesses might be competing, 
and profits would not figure in the costs at that 
stage; in other processes unskilled labour at a 
subsistence wage might be employed, and this 
"wear and tear" alone would cost. 

It is, however, all-essential to perceive the need 
of a close coordination of the three factors of pro- 
duction. Every price must contain a provision 
against the wear and tear of the land, capital, 
and labour employed at each stage of production 
(whatever that wear-and-tear fund be called), and 
it must contain a variety of positive costs required 
to evoke the use of the ""marginal " portion of the 
land, capital, and labour required. These costs 
may be merely nominal, as where no-rent land. 



192 THE ECONOMICS OF DISTRIBUTION. 

no-interest capital, no-wage (15s.) labour, be 
used; or they may be positive, where the worst 
portion of the land, capital, or labour in use 
requires a positive marginal rent. 



CHAPTER VI. 

THE COORDINATION OF THE FACTORS OP PRODUC- 
TION. EFFECTS ON THE THEORY OP PRICE AND 
DISTRIBUTION. 

§ 1. The results of our reasoning have been 

(1) to coordinate the several factors of production 
with regard to the application of a Law of Rent; 

(2) to amplify the Law of Rent by distinguishing 
a number of margins of employment with differen- 
tial rents measured from these margins, the mar- 
ginal rents entering into price, the differential 
rents being excluded from price ; (3) to substitute 
a composite margin for the land-margin in con- 
sidering the effects of increased demand upon 
production. 

Now this restatement and expanded application 
of the idea of rent throws important light upon 
two closely related matters: (1) the composition 
of a price as an amalgam of payments for the use 
of various factors of production ; (2) the theory of 
Distribution or of the proportion in which price is 
divided as income among the owners of factors of 
production. 

An increased demand for a commodity which, 

193 



194 THE ECONOMICS OF DISTRIBUTION. 

by raising its price, stimulates an increased rate 
of production, will in most cases lower the margin 
of employment of all three factors, calling into 
economic use inferior qualities of land, labour, 
and capital. The new use, not only of land, 
but of labour and of capital, will, considered as 
a separate unit, be more expensive to buy than 
the same quantity of the old use, for the same rent 
which was paid before for an acre of marginal land 
will now be paid for an acre of land below the 
former margin; and, since a larger number of 
acres will be required to furnish a given quantity 
of productive power, the price of a unit of land- 
use will be greater; so, likewise, an increased 
number of inferior labourers must be employed at 
the same wages previously paid to the marginal 
labourers formerly employed, in order to obtain a 
given increment of labour-power, and a higher 
price must be paid for a given quantity of use of 
new forms of capital. The case of capital should 
be clearly understood. If there are in actual exist- 
ence unused forms of capital, plant, machinery, 
etc., somewhat inferior to those in previous use, 
these stand precisely in an analogous position to 
land which lies below the margin ; in order to get 
out of them a given amount of productivity of capi- 
tal, a larger number must be employed than of the 
superior forms, and the payment will be the same 
as in the case of these latter. This can only be 
done by increasing the payment for the use of each 



THE FACTORS OF PRODUCTION. 195 

mill, machine, or other concrete piece of capital, 
which means a rise of price per unit of capital- 
power and a corresponding raising of the differen- 
tial rent or interest of the better sorts of forms 
of capital which were formerly in use. The same 
result occurs if, instead of bringing into use in- 
ferior existing forms of capital, it is sought to 
work more fully existing forms of capital already 
in use ; this is analogous to an attempt to get more 
land-power out of a given piece of land by intenser 
cultivation; in each case the added increment of 
productive power is obtained at a greater expense, 
which can only be defrayed on condition that forces 
of supply and demand have raised the price of 
a unit of productive power. Similarly, if no un- 
used or half-used forms of capital exist, and the 
new use of capital now required must be supplied 
by new savings, these new savings can only be 
brought into economic existence by raising the rate 
of interest, so that the new forms of capital will 
be paid at a higher price for their use than the old 
forms were previously paid. 

§ 2. At first sight this seems to indicate the 
universal dominance of the Law of Diminishing 
Returns over the whole field of industry. If 
the demand for an increased use of each factor 
calls into use an inferior quality of the factor, 
involving an increased expense for a given quan- 
tity of each sort of productive power, with every 
increase of supply the marginal cost would rise, 



196 THE JSCONOMIGS OF DISTRIBUTION. 

and the price of the whole Biipply would bo 
enhaiu'od. 

Indoetl, so long as a purely meohanioal character 
is accorded to the operation of productive forces, 
and each new unit of force is simply regarded as 
an addition to the old units, there is no escape 
from the Law oT Diminishing Returns. Wliy, 
then, do we say that the Law of Diminishing 
Returns dominates agriculture and the extractive 
industries, and enters manufactures juul other in- 
dustries only in proportion as raw materials and 
productive powers of nature are expenses of pro- 
duction ? Why do we trace a Law of Licreasing 
Returns in many industries? 

The explanation is this. When the margin of 
oultivatiun for land is lowered and inferior lands 
are brought into use, tlie addition of the new in- 
crements of land-use lias no power to raise the 
productiveness of the earlier increments of land- 
use ; no doubt the same causes which have lowered 
the margin of cultivation have raised tlie price of 
the productivity of the better lands, but they have 
not made them absolutely more productive; the 
dilTerent portions of land stand in no strong or- 
ganic rolati(tu, so that, what hiip]H>ns to one piece 
will alVect the productivity of other pieces. To a 
certain extent it is true that the enlargement of a 
farm by taking on inferior outlying land might 
enablt^ the farm to be more self-sustaining, by 
promoting a more advantageous division of uses 



TUE FACTORS OF PRODUCTION, 197 

in the other land, the new inferior land perhaps 
furnishing certain necessary accommodation which 
would set free a better piece of land for a more 
profitable use. But in every country for most 
sorts of farming there are well-recognised limits 
of size, and any further taking in of land beyond 
the economic limit will not recoup the farmer for 
the inferiority of the new land by any sufficient 
gain in the arrangement of his operfitions. 

The economies of division of labour which often 
attend large farming as compared with small farm- 
ing cannot of course be imputed to an increased 
productivity of land-use, as they are not attained 
by a mere addition of new increments of land. 

Since the new units of inferior land-use, ob- 
tained by lowering the margin of cultivation, have 
no considerable or corresponding inlluence in rais- 
ing the productivity of other productive force 
resident in other portions of land, we obtain a 
diminishing return from a given (piantity of 
labour applied to agriculture Avhere inferior lands 
are called into use.^ 

§ 3. With labour it is different. Though, if 
we treat the new increment of labour-power as a 
thing apart, it seems to give a diminishing return, 
that diminution may be more than compensated 

1 When agriculture has become chiefly a cai)italist rather 
tlian a hind enterprise, it may sometimes conform to a Law 
of Increasing Returns, as possibly in some forms of bonanza 
farming. 



198 THE ECONOMICS OF DISTRIBUTION. 

by its influence upon the aggregate of labour-power 
with which it is cooperating. We have here to 
consider a close organic structure of industry, so 
that a lowering of the margin of employment of 
labour may be followed by such improved efficiency 
of the whole cooperative mass of labour-power as 
shall enable the increased aggregate of supply of 
commodities to be produced less expensively in 
terms of labour-use than the former smaller 
aggregate. 

This is no more than to say that the Law of 
Diminishing Returns is a law of matter, the Law 
of Increasing Returns a law of mind. Just in 
proportion as labour-power is low-skilled and 
physical, its efficiency depends less upon intelli- 
gent cooperation and is less amenable to speciali- 
sation. A lowering of the standard of employment 
in navvy labour or in the labour of fruit-pickers 
may easily show that the industry conforms to the 
Law of Diminishing Returns, i.e. that the infe- 
riority of labour at the same pay is not compensated 
by improved division of labour or other organic 
economies of the particular business. It is just 
in proportion as we rise to those grades of labour 
in which physical power plays a relatively unim- 
portant part, that we realise the operation of the 
Law of Increasing Returns. 

It is the inelasticity, the inorganic character of 
the productive powers of nature, which Ricardo 
signified by applying the epithets " inherent and 



THE FACTORS OF PBOBUCTION. 199 

indestructible," that explains the operation of the 
Law of Diminishing Returns. The productive 
powers of man must be so ordered by intelligent 
cooperation that the addition of factors inferior to 
those in former use may raise the volume of pro- 
ductive power by a total larger than that repre- 
sented by the numerical proportion which the new 
units of labour-power bear to the old aggregate 
supply, 

§ 4. It is difficult to know whether we ought 
to classify capital with land or with labour in 
respect of increasing or diminishing returns. An 
addition to the 'stock of capital obtained by lower- 
ing the margin of employment may be represented 
as giving an increased efficiency to the capital 
in earlier use, by allowing more specialisation of 
capital. But since this increased efficiency or 
productivity would be inseparable from the em- 
ployment of an increased volume and division of 
labour-power, such increasing return would best 
seem attributable to economy of increased labour- 
power. 

The actual effect of a demand for increased 
capital is of course, often to introduce improved 
forms of capital, which, so far from needing for 
their utilisation an increased supply of labour- 
power, cause a net displacement of direct em- 
ployment, taking the business as a whole. But 
this case is not an illustration of a lowering 
of the margin of employment, for the new forms 



200 THE ECONOMICS OF DISTRIBUTION. 

of capital called into use are not inferior to the 
old; it is parallel to the opening up of a new rich 
tract of land, which may for a time reverse the 
normal tendency whereby an increased demand 
calls inferior lands into use. 

If, however, this analogy does not dispose of 
the case of improvements in quality of capital- 
forms, it will he necessary to refer this apparent 
application of a law of increasing returns for capi- 
tal to the labour represented by the invention of 
the new forms taken by the increment of capital. 
The capitalist below the margin of employment is, 
qua capitalist, capable of putting in the field of in- 
dustry only the customary form of capital ; the in- 
terest paid him for this cost of saving is the price 
for producing an increment of the old forms of 
capital. These new copies of the old forms of 
capital cannot, I think, be rightly or conveniently 
regarded as giving such increased efficiency to 
the similar forms which have been functioning in 
industry as to afford an increasing return to the 
increased aggregate. 

While, therefore, I claim that it is convenient 
to attribute direct productivity to forms of land 
and capital, an increased demand for their use, 
which compels recourse to inferior or more expen- 
sive portions, can exercise this compelling power 
only in conformity with the Law of Diminish- 
ing Returns, by raising the former price of each 
unit of land-use or capital-use. This is, of course, 



THE FACTOBS OF PBODUCTION. 201 

not inconsistent with the general tendency of the 
rate of profit or real interest to fall. Although 
there may be a growing willingness to save for a 
lower rate of remuneration, still, if we compare 
the actual saving which takes shape in capital 
with the potential saving which might take shape, 
we must regard the latter as lying below the mar- 
gin of emploj-ment, and only capable of coming 
into actual existence on condition of a higher rate 
of interest than is paid for capital already in use. 

Only when we take the productive prices of 
labour-power which function at the command of 
the human will, do we escape the limits set by 
the material world upon industry. So long as we 
persist in measuring labour-power in independent 
units, we fail to understand the vital law of in- 
dustrial growth. The Law of Increasing Returns 
is simply the law of intelligent cooperation. 

§ 5. This is nothing but a necessary theoretic 
preface to the study of progressive production in 
the several industries. 

When we have grasped the idea that a composite 
margin of employment must be substituted for a 
land margin, we shall be obliged to work out in 
each case of increased supply the problem how far 
this new increment of supply lowers the margin, 
and how the lower margin is composed. 

At this point we perceive the identity of the 
theory of the Composition of Price with the 
theory of Distribution. 



202 THE ECONOMICS OF DISTRIBUTION, 

In order to illustrate tlie operation of tlie Law 
of Rent as the determinant in distribution, it will 
be best to take the case of an increase in the 
product to be distributed. Our question then 
will be, What determines the proportion of the 
increased product which goes to the owners of the 
three requisites of production ? or, in other words, 
reverting to our general application of the law of 
rent, What determines the rise of marginal and 
differential rents in the case of land, capital, and 
labour, respectively? Let us assume, for con- 
venience, that the increased product requires for 
its production an additional quantity of land, 
capital, and labour, involving a proportionately 
equal increase in all three factors of production, 
e.g. a rise of 10% in the quantity of each factor 
industrially employed. How will this increased 
demand for the use of the factors of production 
affect the proportion in which the product shall 
be distributed? 

If the demand for use of more land, capital, 
and labour can be met by the employment of a 
new supply of each, lying just below the margin 
of employment, but only nominally inferior to the 
supply in previous use, the prices of use of land, 
capital, and labour will not appreciably rise, and 
the new product will be divided among the three, 
in strict accordance with the previous proportions. 
In that case, the fall of the margin of employment 
and the rise in rental of each rent-paying portion 



THE FACTORS OF PRODUCTION. 203 

of the land, capital, and labour in previous use 
will be very slight — just sufficient to call into 
economic existence the required increase of sup- 
ply. But if, while there is plenty of land and 
capital available, of barely inferior quality to that 
on the margin of employment, an equal addition 
to the supply of labour is not so easily procurable, 
the growth of demand for labour acting in relation 
to a fixed supply will raise the price or rent of 
labour above the margin of employment until that 
margin is driven down low enough to include the 
required new supply. That is to say, while in 
the case of land and capital a merely nominal fall 
of the margin involving a nominal rise of rent has 
produced the new supply, in the case of labour a 
considerable fall of the margin, attended by a con- 
siderable rise of rent, has been required to produce 
a corresponding increase of supply. Thus, while 
the rent of land and capital remain practicall}'- at 
the same level as before, the rent of labour will 
have risen greatly, and will absorb almost the 
whole of the increased product, shifting the bal- 
ance of proportion in the distribution of the aggre- 
gate product among the industrial community. 

The advantageous position here accorded to 
labour may with equal reason be assigned to land 
or capital. In proportion to the difficulty of sup- 
plying each increased quantity of the several 
requisites of production, will be the rise in price 
of each unit of those factors already in use. The 



204 THE ECONOMICS OF DISTRIBUTION. 

mechanism by which this operates is very simple. 
The rise of price will be caused by the deficiency 
of available supply considered in relation to an 
increased demand reckoned at former prices ; the 
new supply can only be brought into the same 
quantitative relation to the new demand by the 
maintenance of a new price per unit of productive 
power, the new price representing in relation to 
the old the greater difficulty of keeping in eco- 
nomic use the determinant portion of supply of 
that factor of production. 

Thus we reach the law that the proportion of the 
aggregate product which is paid as rent of land, 
of capital, and of labour varies with the difficulty 
of keeping in economic use the quantity of each 
factor of production required to maintain the rate 
of current production. As there is vacant land 
below the margin of cultivation (i.e. yielding less 
productive power per acre than can be utilised at a 
given amount of expenses of cultivation per acre), 
so there is potential capital (i.e. capital containing 
powers of productivity too low to defray working 
expenses at formerly current remuneration, but 
which, given a sufficient motive, will become 
active forms of capital); and, lastly, there is va- 
cant labour of inferior quality (i.e. a larger quan- 
tity of which is required to furnish a given 
amount of effective labour-power). In each case, 
the potential or unemployed factor is called into 
economic use by a sufficient rise in the rent of that 



THE FACTORS OF PRODUCTION. 205 

which lies above the existing margin of employ- 
ment. 

This theory that changes in the proportionate 
payments to land, capital, and labour, are depend- 
ent upon the comparative ease or difficulty of in- 
creasing the supply of each, would seem so obvious 
a truth that it could not have failed to secure ade- 
quate recognition. That it has failed to do so 
must be attributed to the extreme reluctance which 
economists have shown to admit the truth, that the 
only immediate cause of a change of price is a pre- 
vious change in the quantitative relation of supply 
and demand at current prices. If it were once 
clearly recognised that a restriction of supply at 
current prices were the only possible immediate 
cause of a rise of price, and if this were kept in 
mind in dealing with the prices of the use of land, 
capital, and labour, the main difficulty in forming a 
satisfactory theory of distribution would disappear. 

It will perhaps be convenient to sum up the 
conclusions so far reached in the following three 
propositions : — 

1. If there exists an indefinite quantity of each 
of the factors of production just below the margin 
of employment, of almost equal quality to that 
upon the margin, an increase in production will 
neither alter the proportion of distribution among 
the owners of the three factors nor appreciably 
raise the differential rent of each portion of a 
factor above the margin. 



206 THE ECONOMICS OF BISTBIBUTION. 

2. If there is not a sufficient quantity of any of 
the factors of production easily available for new 
supply, and the difficulty of procuring each piece 
of additional supply is equal in the case of each 
factor, the differential rent of each rent-paying 
piece of land, capital, and labour will rise, but the 
proportion of distribution of the aggregate pro- 
duct will remain unchanged. 

3. If there is a difference in the amount of 
difficulty of procuring the increased supply of the 
three factors, that difference will be accurately 
measured by the relative rise in rent of the rent- 
paying portion of each factor, and by a corre- 
sponding alteration in the proportion of the 
aggregate product which falls to each, i.e. if it 
is desirable to increase by 20% the quantity of 
each factor of production in order to increase the 
product, and it is twice as difficult to procure the 
increased quantity of land as of capital and labour, 
one-half of the increased product will go as rent 
to land, one-quarter as rent to capital, one-quarter 
as rent to labour. 

In applying the rule of measurement thus far, 
we have assumed the case where the increase of 
production acts as a call for an increase in the use 
of the three factors which is proportionately equal. 
But, in fact, it is of course seldom the case that 
the proportionate part played by the respective 
factors of production remains the same when 
there is an increase of production. It by no 



THE FACTORS OF PRODUCTION. 207 

means follows that if in the old quantity of pro- 
duction the numbers 3, 2, 5, represent the respec- 
tive contributions of land, capital, and labour, and 
the production be doubled, the same proportion 
will hold among the contributors. The Law of 
Substitution is constantly operative, enabling capi- 
tal to displace labour, economising land by in- 
creased use of capital or labour. ^ We know, in 
fact, that every increase in the aggregate product 
will be attended by a change in the proportion of 
the contribution of the three factors. Hence the 
practical application of our rule of measurement 
is obviously no easy task. For every change in 
the distribution of the aggregate product will de- 
pend on the relative strength of two forces : first, 
the relative growth in the demand for each factor 
signified by the increased product ; second, the 
relative difficulty of supplying that increased de- 
mand. The frequent use of the word " relative " 
here is itself a proof of the complex nature of the 
problem. Before we can say in what degree an 
increase of 10% in the aggregate production of a 
community will affect the proportionate distribu- 
tion, we should have first to ascertain two facts : 
{x) the precise amount of land, capital, and labour 

1 Bohm-Bawerk, in his treatment of The Value of Comple- 
mentary Goods, clearly and accurately indicates the importance 
of the Law of Subsfcitntion among the requisites of production in 
determining the amount of remuneration which each of the 
several factors obtains. He first shows relative indispensability 
as the measure of economic force. 



208 THE ECONOMICS OF BISTBIBUTION . 

required to take part in the new production and 
the proportion each addition bears to the quantity 
in previous use ; and {y) the extent of the fall in 
margin of employment necessary to furnish in the 
case of each factor the desired increase. Now, 
each of these two facts, x and y^ is itself a resultant 
of various conflicting forces, and can only be as- 
certained by an elaborate calculation. 

A whole group of considerations affects the pro- 
portionate increase of each factor of production 
required by each increase in the aggregate pro- 
duction. Among them the following are most 
prominent : — 

1. Improvements in the industrial arts, and 
application of labour-saving machinery, (a) ena- 
bling the same quantity of capital to suffice in 
turning out an increased product, (5) enabling 
capital to take the place of labour, so that what 
might seem to be an equal demand for more capi- 
tal and more labour, will act as a demand for a 
large quantity of new capital and a small quantity 
of new labour. 

2. Social and industrial reforms, improving the 
organisation of labour, or inducing greater care and 
economy in the use of material and of machinery, 
will, hj adding to the average effectiveness of both 
capital and labour, enable an increase in the aggre- 
gate product to be achieved by a less than corre- 
sponding increase of capital and labour. Even here 
the movement is not simple, but complex. E.g. 



THE FACTORS OF PRODUCTION. 209 

in the case of economy effected by cooperation or 
profit-sharing, so far as the economy consists in 
greater care of machinery and less waste of mate- 
rial, it might operate as an equal check upon the 
increased quantity of both capital and labour re- 
quired to furnish an increased product. So far 
as it acted merely as a stimulus to greater work- 
ing activity, it would figure chiefly as economy of 
labour, so that an increased product might be 
wrought by the same quantity of labour acting in 
conjunction with an increased quantity of capital. 

3. Every improvement of physique, morale, in- 
telligence, and technical skill among the workers 
will enable a demand for more labour-power to be 
satisfied by a less than corresponding increase in 
the number of workers. 

4. Improvement in agricultural arts may en- 
able a larger product to be obtained without a 
corresponding fall in the margin of cultivation, 
i.e. without a correspondingly increased employ- 
ment of land. 

These are some of the determining forces which 
would require study before we could reach the 
resultant x. Another set of forces and circum- 
stances affect the ease or difficulty of procuring 
increased supplies of the respective factors of 
production. Such are the following: — 

1. The effect of growing improvements in 
communication, and the breaking down of inter- 
national barriers for trading purposes, in their 



210 THE ECONOMICS OF DISTRIBUTION. 

respective bearing upon (a) tlie increase of the 
effective land supply for a given community, (6) 
the increased " fluidity " of capital, {c) the easier 
migration of labour. 

2. The effect of war, political insecurity, na- 
tional commercial restrictions, and the like, as 
affecting {a) the available quantity of each requi- 
site of production, (5) the relative fluidity of each 
factor of production. 

3. Effects of the growth of prudential motives, 
increased sense of security, and fluidity of capital, 
as affecting the ease with which an increased de- 
mand for capital may be supplied. 

4. Complicated effects of rising standard of 
comfort, education, artificial checks on population, 
and the like, in determining the increased supply 
of labor at different degrees of availability. 

It is not too much to say that each of these 
considerations opens up a large field for specula- 
tion and involves special difficulties of its own. 
Each of them has an importance in assisting to 
determine the resultants x and y. But, unfortu- 
nately, this is not all. x^ representing the amount 
of land, labour, and capital required for an in- 
creased production of commodities, or any single 
commodity, is not the simple composite we have 
assumed it to be. The land it represents is itself 
composed of a great variety of land-uses entering 
into the different processes of production, some 
with differential rents measured from a no-rent 



EFFECTS. 211 

margin, others with differential rents measured 
from positive margins. In some of these cases 
the increased demand for commodities will greatly 
lower the margin, raising largely the differential 
rents; in other cases the increased supply can be 
afforded by a very small fall of the margin; in 
other cases, maybe, the fall of margin may be ob- 
viated by a change of method of production which 
will economise land-use by increasing uses of capi- 
tal and labour in conformity with the Law of Sub- 
stitution. Thus the effect of increased demand 
for land-use will affect differently the land-use 
employed in all the processes. The same will 
apply to capital and labour, various specific and 
individual forms of which will contribute to the 
production of supply at different points. When, 
therefore, we consider what would be the effect 
of an increase of supply of 10 % of any com- 
modity in affecting the proportion of the price 
which will be paid to the owners of the different 
factors, we are evidently faced by a very complex 
computation. The determination of both x and y 
has to be made first separately at each point in 
production. But even that will not suffice. Not 
only should we have to measure the relative press- 
ure with which these two forces act at each sev- 
eral point in the increase of production, in order 
to reach the change in the proportionate distribu- 
tion. For alas! x and y cannot be determined as 
entirely different forces. These are not merely 



212 THE ECONOMICS OF DISTRIBUTION, 

two varying forces, but varying forces wliich act 
upon one another with a force which likewise 
varies. What we mean is this: it is impossible to 
state accurately how much new land capital and 
labour would be used to furnish an increased 
product, unless we know already the amount of 
difficulty there would be in procuring that in- 
creased supply; for we cannot without that know- 
ledge determine how far labour-saving machinery 
may be introduced instead of an increased quantity 
of labourers, nor can we determine how far the 
increased demand for land will operate in intenser 
or more efficient culture of the land already above 
the line of occupation, instead of stimulating the 
enclosure of hitherto unused land. On the other 
hand, it will be evident that we cannot ascer- 
tain exactly the amount of fall in the margin 
of employment of the three factors of produc- 
tion, unless we know, not merely what increased 
product is required, but also to what extent 
this increased demand will act upon the three 
factors of production respectively, — in fact, until 
we know the resultant x. As the two main 
forces, which for convenience we regarded as 
distinct, are thus seen to modify one another, the 
full nature of the complexity of the problem of 
distribution begins to dawn upon us. In order 
accurately to ascertain the disturbance in propor- 
tionate distribution of the product between land, 
labour, and capital caused by an increase or de- 



EFFECTS. 213 

crease of production, we have in effect to measure 
the varying pressure of a number of industrial 
forces (which pressure also varies in the rate of 
its variation), each of which affects a number 
of other forces with different degrees and varying 
rates of attraction. We have u^ v, w^ rr, y, 2, etc., 
all moving at different rates, and all affecting one 
another to a different degree in proportion to the 
force of their respective motions. 

Such is the intricate theoretic setting of the 
problems which have to be worked out by the 
managers of businesses and by the organisers of 
labour. In each trade, at each time, in each 
country, the problem will be different. Indeed, 
if we take the standpoint of nationalism in eco- 
nomics, and ask what the effect upon the demand 
for the several factors for the different processes 
in a particular country will be, arising from an 
increased demand for a class of commodities, we 
have to consider not merely the purely economic, 
but also the political considerations which move 
nations in this trade competition. 

Those whose business it is to work out the 
probable influence upon profits or wages of an 
assumed increase or decrease of production in a 
particular trade, are compelled to consider the 
cooperation of all these forces, so far as they are 
ascertainable. The success of a particular capi- 
talist enterprise or of a labour movement will 
ever more largely depend upon the skill and 



214 THE ECONOMICS OF DISTRIBUTION, 

experience of those responsible for such compu- 
tation. 

We have now discussed the changes in termi- 
nology and in point of view requisite to coordinate 
land, labour, and capital, so as to measure their 
influence upon price and their respective strength 
as claimants upon the general product. We have 
seen that the conception of a margin of employ- 
ment with differential rents for more productive 
forms is equally applicable to all three factors, 
while a right regard for the Law of Substitution 
involves the application of a composite margin 
of employment in considering the effect of an 
increased or a decreased demand for productive 
energy upon the distribution of the product 
among the owners of the factors. 

It has also appeared that the process of deter- 
mining the price of a supply of land, labour, or 
capital is substantially the same as the process of 
determining the price of a supply of commodities, 
when acres, labourers, and ^lOO's of capital are 
reduced to some standard measure of the produc- 
tive power which, underneath the irregularities 
of form, is the real object of sale. The price- 
point for the sale of a unit of land-power, capital- 
power, labour-power, is determined by the stronger 
of a final pair of bargainers within limits reached 
by competition of buyers and sellers of these fac- 
tors of production. The wide external differences 
between a market for goods and a market for sale 



EFFECTS, 215 

of the several factors, where competition is often 
extremely slow, indirect, and incomplete, must not 
blind us to the substantial identity of the economic 
processes. When the competition is slight and 
imperfect, the result is that the upper and lower 
limits of price are wider apart than in a freely 
competitive market for goods, so that the eco- 
nomic force of the stronger of the final bargainers 
has fuller scope. The contrast between the money- 
market or the wool-market under normal condi- 
tions, and the market for sale of land-uses in a 
growing city, is no doubt a striking one ; but 
though competition lapses at a far earlier point 
in the latter than in the former cases, the differ- 
ence is one of degree and not of kind. In both 
cases, competition between buyers and sellers, 
in both cases, economic force are determinants of 
price, though to different extents. 

To those who are lovers of simplicity this may 
not seem a very satisfactory result, but a large 
part of the disrepute from which the science of 
economics suffers among " practical " men is due, 
not, as is often alleged, to an inherent distaste for 
theoretic treatment, but to the hasty fabrication 
of economic laws which are so delightfully simple 
that an attempt is made to use them as " rules 
of thumb " in the actual movements of industry. 
They are then found to be inapplicable, and the 
practical man is not satisfied with the scientific 
economist's elaborate explanations of the difficul- 



216 THE ECONOMICS OF BI8TBIBUTI0N, 

ties involved in applying economic laws to details 
of economic fact. 

These intricate considerations teach caution. 
They are often used to suggest inertia. Many 
of the forces involved are quite incapable of accu- 
rate measurement, and it may easily be shown that 
it is impossible to predict with any degree of cer- 
tainty the effect upon profits or employment of 
a particular industrial action involving a change 
in demand for the several factors of production. 
But this does not justify inaction. Human con- 
duct is always speculative ; the future never admits 
of exact prophecy ; risk and faith are at all points 
essential to progress. A reasonable man is pre- 
pared to take ordinary chances, his calculations 
are confined to a comparatively small number of 
factors, and these not exactly measured; after a 
reasonable computation of certain large issues he 
can often afford to ignore smaller ones. Wide 
experience produces a capacity of judgment which 
is apparently intuitive, though strictly ratiocina- 
tive in its secret working. 

Hence large industrial movements affecting the 
production and the distribution of wealth are often 
rigidly guided by a clear grasp of certain leading 
facts or generalisations. For example, large or- 
ganisations of labourers may be quite incapable 
of working out all the intricate effects upon each 
trade, of a general policy of higher wages or shorter 
hours ; but they may have a right knowledge that 



EFFECTS. 217 

the conditions of bargaining between labourers 
and employers are on the average so favourable 
to the latter as to place in their hands a large 
surplus of wealth, the diversion of which into 
higher wages or more leisure is economically fea- 
sible. Possessing such knowledge, they will not 
rightly be deterred from action by the real risks 
involved by the pressure of other unknown or in- 
calculable forces upon certain sections of labourers. 
It is sufficient if they make good use of such know- 
ledge as they can get. Human conduct is notori- 
ously enfeebled, or even sterilised, by the growing 
conviction of risk and uncertainty which weighs 
upon the student who comes to realise the infinity 
of knowledge in any department of inquiry. The 
practical man has to decide for himself how much 
he may safely leave unknown, though he can never 
know exactly how much this is, and what risks 
he must be prepared to run, though the precise 
size and nature of these very risks must always 
baffle him. 



CHAPTER VII. 

BARGAINS FOR THE SALE OP LABOUR-POWER. 

§ 1. There are certain special considerations 
affecting the sale of labour-power which make 
the sellers of that commodity normally weaker 
than the buyers. 

This normal condition of inferior strength is 
often summed up by saying that it is more im- 
portant or more pressing for the individual owner 
of labour-power to effect a sale than for the em- 
ployer to effect a purchase. 

This is evidently and particularly the case where 
there exists an excess of any kind of labour-power 
beyond the amount required at a price which would 
enable minimum business profits to be earned. A 
supply of goods or of land which, if it is placed 
upon the market, would bring down prices to an 
unprofitable level, can in most cases be withheld 
from the market without sustaining irrepara- 
ble damage. This is not the case with labour- 
power. It must be sold ; if not sold for a week, 
not only is the week's supply wasted, but the 
aggregate of labour-power, the labour-capital, the 
labourer himself, perishes. This labour-power 

218 



THE SALE OF LABOUR-POWER. 219 

must be sold continuously; it must be sold in 
small quantities, commonly measured by the day 
or week ; finally, it must be sold to a buyer who 
knows the necessity under which the seller stands 
to effect a sale. In a word, the labourer is selling 
his labour-power under the conditions of a forced 
sale. In a labour-market the bargain of the mar- 
ginal pair (which directly rules the price) will be 
that of a seller whose inability to refuse a bar- 
gain is known all the time, to the buyer with 
whom he is "higgling for a price." Under such 
circumstances the superior force of the buyer is 
so well recognised that he is commonly able to 
avoid the necessity of higgling, and to dictate a 
customary price of labour. Again, the organic 
continuity of an individual's labour-power, the 
fact that one week's energy is vitally connected 
with the next week's, makes his weakness in bar- 
gaining a cumulative disadvantage. ^ A bad sale 
for a number of weeks or months, a failure to 
obtain regular and proper employment at reason- 
able wages, brings about a deterioration of work- 
ing efficiency for the following weeks, and perhaps 
a permanent injury to physique and morale. 

These weaknesses of bargaining attach to labour- 
power, as distinct from other things that are sold, 
because labour-power cannot be detached from 
the vitality of which it is a function. 

Putting this peculiarity in another form, we 
1 Cf. Marshall, Principles, 2d ed., Vol. I, p. 602. 



220 THE ECONOMICS OF BISTBIBUTION, 

may say it resides in the fact that, while the 
worker is selling a portion of his labour-power, 
he is also buying the permission to live, and the 
future production of his labour-power depends 
upon the terms of this purchase. Hence, while 
the employer is directly concerned only with the 
purchase of labour-power, the inevitable terms of 
such a purchase give him power over other vital 
functions which he does not buy, but which are 
*' thrown in for nothing." What I mean is ad- 
mirably summed up by Mrs. Webb : " The wage- 
earner does not, like the shopkeeper, merely sell 
a piece of goods which is carried away ; it is his 
whole life, which, for the stated term, he places 
at the disposal of his employer. What hours he 
shall work, when and where he shall get his 
meals, the sanitary conditions of his employ- 
ment, the safety of the machinery and tempera- 
ture to which he is subjected, the fatigues or 
strains which he endures, the risks of accident or 
disease which he has to incur, — all these are mat- 
ters no less important to the workman than his 
wages. Yet about the majority of these vital 
conditions he cannot bargain at all."^ 

Even if he can bargain, he bargains at a grave 
normal disadvantage. Even where collective bar- 
gaining has largely taken the place of individual 
bargaining, the power of labourers to get adequate 
safeguards against the abuse of these individual 
1 Commonwealth^ February, 1896. 



THE SALE OF LABOUB-POWEB. 221 

risks and hardships has been small, and as they 
are no proper part of what is offered in the sale of 
labour-power, no monetary compensation is appro- 
priate and no monetary valuation possible. " All 
that a man hath will he give for his life." The 
necrosis of the phosphorus match-maker, the 
phthisis of the Belfast linen-spinner, are not part 
of any bargain and are not paid for. 

§ 2. How far the process of collective bargain- 
ing improves the relative position of the sellers 
of labour-power, so far as the price is concerned, 
it is difficult to judge. Bearing in mind that 
capital is generally far more advanced in collec- 
tive organisation than labour (each large employer 
bringing a large number of closely welded units 
of joint-stock capital to confront the much more 
loosely and imperfectly welded units of labour- 
power), it is difficult to believe that the substi- 
tution of the labour-group for the single labourer 
can redress the balance of advantage on the side 
of the employer. This involves no depreciation 
of trade-unionism ; a group of labourers bargain- 
ing for a sale of labour-power over a long period 
of time, through skilled agents, is absolutely in a 
far stronger case than a single labourer, higgling 
like an ignorant amateur. But where organisa- 
tion of capital has made similar advances, the 
relative advantage of the employer may be as 
great as ever. For any modern struggle between 
equally developed organisations of manual workers 



222 THE ECONOMICS OF BISTBIBUTION. 

and employers, so far as it is left to economic 
might, untempered by legal or charitable interfer- 
ence, exhibits the superior power of the employer 
resting on the fact that the sale of labour-power 
involves the purchase of the right to live; the 
power to starve labour into submission still sur- 
vives as the final economic arbiter. So far as 
organisations of labourers can modify or postpone 
this superiority of the employer, it is not by the 
mere substitution of collective for individual bar- 
gains in sales of labour-power, but by amassing a 
fund of capital so that they may no longer con- 
tend as mere proletariat. The attempt of a trade- 
union with accumulated funds to fight a body of 
employers is a fight of capital against capital. 

§ 3. The ordinary process by which the wage is 
immediately determined is sometimes regarded as a 
separate disadvantage to the labourer. Whereas 
the employer may have before him a number of 
applicants for employment who will closely com- 
pete and underbid one another, it does not often 
happen that employers meet face to face and di- 
rectly compete to buy the services of a labourer. 
Thus it appears that the levelling tendency of 
competition is less operative among the buyers 
of labour than among the sellers. The immediate 
position which faces an . unorganised worker ap- 
plying for a job is one which offers hunger and 
possible starvation as the alternative to accepting 
the offer of an employer; for though there may 



THE SALE OF LABOUR-POWER. 223 

be other employers who will each separately be 
willing to make an offer, he cannot rely upon 
this being the case, nor can he make these sev- 
eral employers bid directly against one another. 
Where, as is the case in many trades, the supply 
of available labour is normally in excess of the 
demand at the standard wage, the economic w^eak- 
ness of the seller of labour is aggravated by this 
mode of conducting the sale. 

" The art of bargaining," observed Jevons, 
"mainly consists in the buyer ascertaining the 
lowest price at which the seller is willing to part 
with his object, without disclosing, if possible, 
the highest price which he, the buyer, is will- 
ing to give. . . . The power of reading another 
man's thoughts is of high importance in business." 
"Now the essential economic weakness of the 
isolated workman's position is necessarily known 
to the employer and his foreman. The isolated 
workman, on the other hand, is ignorant of his 
employer's position. Even in the rare cases in 
which the absence of a single workman is really 
inconvenient to the capitalist employer, this is 
unknown to any one outside the office. What is 
more important, the employer, knowing the state 
of the market for his product, can form a clear 
opinion of how much it is worth his while to give, 
rather than go without the labour altogether, or 
rather than postpone it for a few weeks. But the 
isolated workman, unaided by any trade-union 



224 THE ECONOMICS OF DISTBIBUTIOJST, 

official, and unable to communicate even with the 
workmen in other towns, is wholly, in the dark as 
to how much he might ask." ^ 

The condition of bargaining for sale of labour- 
power which I have described, applies in its ful- 
ness to low-skilled labour. Of such labour we 
may say that the normal wage is one of bare 
subsistence, unless some alternative of squatting, 
stealing, begging, or public charity is able to 
qualify it. To place the "marginal labourer" 
of such a class upon a footing of equal power to 
bargain with the marginal employer who buys his 
labour, it would be necessary : — 

(a) To guarantee him and his family a full 
wage of economic efficiency as an alternative to 
the acceptance of competitive employment. 

(5) To safeguard him in his giving out of 
labour-power, against conditions of work which 
can impair his efficiency for future work. 

Just in so far as certain individuals and classes 
have practically obtained these securities, the 
terms upon which they bargain for the sale of 
their labour-power are superior to those above 
described. 

Bodies of skilled manual workers with a firm 
hold on an important labour-market, where capi- 
tal is in genuine competition, are often able to 
maintain a standard wage for the marginal labour, 
considerably higher than the wage of low-skilled 

1 Webb, Industrial Democracy^ Vol. II, p. 657. 



TBE SALE OF LABOUB-POWEB. 225 

labour. Possessing a "corner" of some highly 
serviceable skill, and perhaps some resource of 
capital, they can reduce considerably the advan- 
tage which the capitalist-employer must naturally 
possess in bargaining with a proletarian. As we 
rise to the professions and other grades of skilled 
mental workers, we are dealing with persons who, 
by reason of some assistance of capital, their own 
or others, or from legitimate confidence in some 
alternative employment, are often able to enter 
on a bargain for sale of this skill, upon terms of 
equal or even superior advantage with the buyer. 

The marginal lawyer or the marginal doctor in 
the West-end market is probably able at least to 
hold his own in the slow and indirect forms of 
bargaining which fix the price of his professional 
skill. 

In each labour-market there will be many in- 
dividuals who can take high differential rents, 
marking their superior value over the marginal 
seller. These differential rents seem to become 
both absolutely and relatively larger as we ascend 
to the higher grades of labour. Indeed, it would 
be straining the system of gradation too far to 
apply it with rigidity to the most highly remuner- 
ated forms of personal or professional service, 
where what is sold is not so much advice, so 
much acting or singing, but where each indi- 
vidual more or less constitutes a market of his 
own, drawing monopoly rents rather than the 



226 THE ECONOMICS OF BISTBIBUTION. 

differential rents which arise where industrial 
services of a more routine or impersonal order 
are sold. 

§ 4. Socialism and labour-movements in general 
are chiefly motived by a more or less clear percep- 
tion that bargains for the sale of labour-power 
differ from other kinds of bargains in that there 
is a considerable normal balance of economic 
strength on the side of the buyers. An applica- 
tion to a labour-market of the analysis applied in 
Chapter I will show that true competition gives 
way at a point which leaves a marginal labourer 
face to face with a marginal employer, under con- 
ditions which enable the latter to fix the price 
close to the lower limit, thus assigning a " forced 
gain " to each buyer of labour-power. 

It is the perception of this inequality which 
places in the forefront of social questions the 
rectification of methods of selling labour-power. 
"In any given state of industrial morality," writes 
Mr. Charles Booth, "the social value of competi- 
tion is measured by its equality — by the posses- 
sion of equal powers both mental and material by 
both sides to a contract or a bargain." ^ No such 
equality exists, or can exist, until equal access to 
all economic and intellectual opportunities is open 
to all. 

1 Life and Labour of the People^ Vol. IV, p. 214. 



CHAPTER VIII. 

BARGAINS FOR THE USB OP CAPITAL. 

§ 1. Some special mystery has been often sup- 
posed to attach to bargains for the use of capital. 
This has arisen partly from people failing to 
understand what was actually sold in a loan, 
what it was that interest was paid to buy, and 
partly from certain circumstances historically as- 
sociated with lending and borrowing. 

I have held a number of sovereigns in my 
strong-box for some time past, and they lie there 
neither increasing nor diminishing in number. 
You come and entreat the loan of them, I let you 
have them, and they begin to breed and return to 
me in a year's time with added sovereigns. How 
can this be? 

Money does not breed ; the wisest of men — Solo- 
mon, Aristotle, Bacon ■ — are sure of that, and they 
are convinced that I have come by the extra 
sovereigns wrongfully, by some process of extor- 
tion. 

If I plead that you, after taking my sovereigns, 
circulated them in commerce, buying goods with 
them, taking these goods to other people and sell- 

227 



228 THE ECONOMICS OF BISTBIBUTION. 

ing them, and that by processes of this kind you 
obtained a considerable increase of sovereigns and 
had some over, even after returning my original 
stock with increase, the above-named worthies 
would not be appeased. For just as I had made no 
increase of sovereigns by lending them to you, so 
you have made no rightful increase by circulating 
them in commerce. If I plead that you have 
not been a loser, then you must have used my 
sovereigns in cheating sovereigns out of others.. 
The process of lending money could give no 
rightful increase, for it cost me nothing to lend 
my idle cash to you, and sovereigns cannot make 
anything, but only pass from hand to hand. 

There was to the ancient mind no ground for 
payment of interest upon money lent ; ^ no valu- 
able service was rendered, whatever origin you 
give to value ; there was no apparent cost and no 
apparent utility. Or if there was an obvious 
utility, if I lent to you in your dire necessity, I 

1 It seems, however, pretty clear that in Babylonia as in 
China, and probably in other ancient societies, a distinction was 
early made between loans for need and loans for business. This 
reasonable distinction would easily make itself manifest even in 
the most primitive forms of lending. "Among the primitive 
progressive peoples who cultivated the wild wheat of Babylo- 
nia, we may feel sure that the primitive instincts of hospitality 
never sank so low, as for one man to ask another to give him 
back with interest, the corn borrowed and eaten in a day of 
need. But the case is quite different as regards com to be 
used, not for food but for seed, capable of bringing forth a hun- 
dred fold." (Simcox, Primitive Civilisation^ Vol. I, p. 194.) 



BABGAINS FOE THE USE OF CAPITAL. 229 

was able to trade upon your weakness, and exact 
terms which were cruel and inequitable. There 
was very little fixed capital used, and compara- 
tively little lending for trade ; most loans were 
made by the rich to the poor to purchase for the 
latter current necessaries of life. Wherever in- 
terest is especially associated with such loans, as 
in Russia to-day, the condemnation alike of the 
theory and the practice of interest is quite intel- 
ligible. 

§ 2. But even when we come to the conditions 
of a modern industrial community, where loans 
are quite as often made to the rich as to the poor, 
where some lenders plainly deprive themselves of 
certain present opportunities of satisfaction, and 
where it is quite clearly seen that what is bor- 
rowed is not really money, but plant, machinery, 
and goods, — though the necessity and even the 
abstract justice of paying interest is generally ad- 
mitted, — there is no clear apprehension of what 
it is that is really bought and paid for by interest. 

" The use of capital," it has been said ; but 
that answer does not carry us far. For what is 
that use ? Capital performs a service in produc- 
tion. Even Karl Marx allows that. But what 
service, and why should it be paid in interest? 
If the service of a piece of capital, (say) a 
machine, consists in helping to work up raw 
materials into finished goods, as it seems, then 
this machine will wear itself out in a few years, 



230 THE ECONOMICS OF BISTBIBUTION. 

or, if one prefers, it will itself be worked up or 
consumed in the goods it helps to produce. Put 
it on a par with the labour that tends it, secure 
the machine against its wear and tear, procure for 
it continuity of existence, by providing against 
depreciation. But whence comes the interest? 
You say " it is productive," but what it has pro- 
duced is clearly the goods which have been sold : 
how has it produced the interest actually paid its 
owner, who, even after the actual machine is dead, 
and is replaced by another one, continues to re- 
ceive this interest just the same? 

§ 3. Just as the interest does not clearly seem 
to correspond to any productivity, so again the 
cost represented by its use is not so patent as in 
the case of labour. Earlier economists of this 
century, including Ricardo, inclined to resolve the 
" cost " incurred by capital into the labour of mak- 
ing the forms of capital. But this treatment of 
capital as accumulated labour gives no explanation 
and no justification of interest. McCulloch's asser- 
tion, ' ' that profits of stock are only another name 
for the wages of accumulated labour," is simply a 
denial of the validity of interest. Take the case of 
the earliest form of capital, which we may assume 
to be entirely made by labour. If the labourers 
who made it sold it, when made, in a free market, 
we should be obliged to say they obtained its full 
value as the wages of their labour ; if, on the 
other hand, they kept possession of it, and either 



BARGAINS FOR THE USE OF CAPITAL. 231 

used it to assist them in their labour, or loaned it 
to others for a similar purpose, at the end of the 
year they would obtain an added value which was, 
ex hypothesis not payment for the original labour 
which went into making it, but was what we call 
interest. In such a simple case it is easy to per- 
ceive that, not the labour-cost of making it, but 
some cost connected with the use of it either by 
themselves or others during the year, was the 
cause why interest comes to them. To the " some 
cost," Senior gave the name of abstinence. These 
men received the extra value as a reward for their 
postponement of their immediate gratification. 
But it was difficult for Senior to explain how 
this cost of abstinence was the efficient cause of 
any increase of wealth, analogous to the increase 
of wealth due to the cost of an output of labour- 
power. " How could mere abstinence, the nega- 
tion of activity," he was asked, "possibly cause 
an increase of wealth which went as interest ? " and 
he had no valid answer. 

How is the cost of abstinence productive ? It 
is quite plain that the taker of interest need do 
nothing but abstain ; that is, in fact, the only 
" cost " he undergoes. This was perhaps not 
clearly seen when most capital was owned by 
workers, who used it to assist their labour. But 
when we turn to the normal use of capital for 
investment, we see that all the owner need do to 
earn the interest he receives is to abstain from 



232 THE ECONOMICS OF DISTBIBUTION. 

immediate consumption, to postpone satisfaction. 
How can this negative action be productive of the 
vrealth returned as interest ? 

For the answer to this question (there is an 
answer), we must turn to another school of econo- 
mists, who have, I think, unconsciously furnished 
a clew to the mystery. 

We have already seen the trouble caused by the 
antagonism of two theories of Value — the "cost" 
and the "utility" theories. I have shown how, 
by approaching value through price, we reach a 
true statement of value as the resultant of forces 
operating from both sides, the relations of cost to 
utility. Now it is worthy of remark that although 
the question of capital and interest has commonly 
been severed from the general theory of value and 
submitted to separate investigation, the same di- 
vergency of conflicting explanations has arisen. 
One set of thinkers explains interest by absti- 
nence — a cost theory ; another by productivity 
— a utility theory. 

It is not curious that this conflict should arise 
in connection with an imperfect theory of value. 
It is, however, of the utmost importance to recog- 
nise that the question of interest is nothing else 
than a particular case of price. 

The Law of Price stated above applies to the 
price of service of capital as to all other prices. 
The loan market is subject to the same forces 
which determine prices in other markets ; there 



BARGAINS FOB THE USE OF CAPITAL. 233 

is the same competition of bargaining pairs, the 
same narrowing of the competitive price toward a 
point finally determined by the will of the stronger 
member of the final pair ; final cost and final 
utility are represented here as in other markets 
by the final pair. 

The final pair in the loan market will, as in 
other markets, consist of the lender who, among 
those who conclude a loan, sets the highest valua- 
tion upon the services he is selling, and the bor- 
rower who, among actual borrowers, sets the lowest 
valuation upon the service he is buying. The 
former, in accordance with our general analysis 
of value, will be the marginal saver (the person 
incurring the largest " cost," or requiring the 
largest inducement to "abstain" or "wait"), the 
latter the marginal borrower (the person who 
imputes the smallest utility to a loan). 

§ 4. But the root questions still await an an- 
swer : " How is the cost of abstinence the cause of 
the utility of capital ? " " What is the ' utility ' 
of a concrete piece of capital which yields a con- 
tinuous interest to its owner ? " 

I build a house, let it to you, you pay me ^80 
a year and undertake to keep it in repair at a cost 
of <£20 a year. You are paying XlOO a year^ 
c£80 of which comes to me as rent or interest. 
What does that interest and insurance buy for 
you ? Clearly the shelter and other conveniences 
furnished by the house. May we not say that 



234 THE ECONOMICS OF DISTRIBUTION, 

the house is engaged in producing a continuous 
supply of shelter ? You say the house is only , 
dead matter and cannot produce. This begs 
the question that conscious human effort alone 
produces. This again is only a question of con- 
venience of terminology. I suggest that it is 
convenient to regard both land and capital as 
productive factors, and their rent and interest 
as analogous to wages. Land is not dead, but 
yields a recurrent supply of natural forces analo- - 
gous to the recurrent supply of labour-power put 
forth by man, and upon similar conditions, viz. 
that she is recouped artificially or is allowed to 
recoup herself for the drains to which she is sub- 
jected. Is it altogether fanciful to suggest that 
the repairs done to the house correspond to the 
subsistence wage paid to labour and to land to 
maintain their continuous economic existence, and 
that the interest paid the owner is for continuous 
services rendered by the natural powers of the 
materials of which the house is constructed, the 
powers to resist rain, atmospheric influences, and 
animal intruders? Do not these, in fact, consti- 
tute the utility for which you pay ^100 ? 

There are those who would make a mystery of 
the fact that capital can yield interest in perpe- 
tuity. " A house or a machine or other piece of 
capital is not," they say, " eternally productive ; 
even allowing it is productive in the way you 
claim, it wears out in time, and yet after it is 



BARGAINS FOR THE USE OF CAPITAL. 235 

worn out and gone and is replaced by a different 
house or machine you will continue to receive the 
interest just the same." 

Yet this difficulty disappears if we look more 
closely at our example. My interest on my house, 
the rent you pay me, is £80, but you value the 
utility you get at XlOO, for you are willing not 
only to pay me <£80, but to spend X20 a year 
in repairs. Now this arrangement about repairs 
is not inherent to the theory of interest. I can 
arrange that you shall pay me ^£100 a year instead 
of X80, and I will do the repairs myself. Now in 
either case provision is made that my capital, my 
house, is eternally productive. The X80 I receive 
will continue indefinitely as the payment for the 
shelter furnished by my house ; this continuity or 
preservation I furnish myself by additional labour 
put into repairs. I may make you pay for these 
repairs, but none the less they are to be deemed 
my repairs, for the house is worth — for an in- 
definite time — XlOO to you, and I only take 
X80 as profit. The case is perhaps still clearer 
if I occupy my own house, enjoying the same 
shelter, and doing the, repairs with my own hands. 
Here it matters little whether I speak of the house 
as capital producing a profit of <£100 or regard 
c£20 as my wages for current repairs. 

Continuous external existence of capital and 
interest is only obtained by consenting to forego 
a portion of a higher profit which could be taken 



236 THE ECONOMICS OF DISTRIBUTION. 

for a limited time. This interest foregone repre- 
sents a continual repair, and since this repair can 
(in theory at any rate) secure eternity for the 
form of capital, there is no reason why the price 
of a utility which still continues should cease to 
be paid.^ 

Or take the case of a machine. If wear and 
tear is provided for, as in the case of the house, 
the objection against perpetuity of interest, on the 
ground that the machine is worked up in a limited 
time into a given quantity of goods, falls to the 
ground. This machine has its continuity secured, 
and it has a yearly productivity consisting of the 
service it renders by cooperating with labour, 
which brings in interest to its owner. This pro- 
ductivity and interest will not, however, disappear 
if, instead of fully providing against wear and 
tear of this particular machine, it is allowed to 
wear itself out and is replaced by another. For 
it cannot matter either in the case of the house or 
the machine whether the .£20, which measures the 
yearly contribution to depreciation, is put into 
repairs of the old structure or the gradual provi- 
sion of a new fabric which shall take its place. 

1 B(jlim-Bawerk begs the whole question when he asserts 
{Capital and Interest^ p. 249) that a house rented is " a store 
of energies to be released bit by bit." Bohm-Bawerk confuses 
the "waste" of the material fabric of a form of capital with 
the "use" of which that waste is one among other conditions. 
That waste made good, as it is made good, the "use" becomes 
perpetual. 



BABGAINS FOR THE USE OF CAPITAL. 237 

The continuous existence of the house or the 
machine does not really obscure or impair our 
understanding of the origin or the legitimacy of 
interest. 

If the owner hired out the machine, he could 
get as rent or interest, say, £100, if he made no 
stipulation as to the wear and tear ; or he can 
let it at X80, on the understanding that it shall 
be kept in repair or replaced when worn out. 
Some people let out machines (^e.g. bicycles) upon 
the former terms, others on the latter ; the former 
yields a higher interest for a limited time, the 
latter a lower interest without the limit. The 
eternity of the capital is secured by what may be 
regarded as a payment out of gross interest, 
which accurately corresponds to a fund for main- 
tenance of economic efficiency and payment of 
rent and wages in the case of labour and of land. 

In order that labour may command a price for 
its use, three conditions are admittedly essential : 
first, there must be objective or technical produc- 
tivity, an actual increase of " goods " due to the use 
of the labour ; secondly, there must be a subjec- 
tive cost or painful expenditure of effort ; thirdly, 
there must be a subjective utility or fund of en- 
joyment afforded by the result of the labour. 

All three conditions we have shown are present 
in the case of the functioning of forms of fixed 
capital. A house or a machine when economi- 
cally used gives out a continuous supply of objec- 



238 THE ECONOMICS OF DISTRIBUTION. 

tive economic goods to which value is attached, 
and a " price " affixed by consideration of the rela- 
tion between the marginal " cost " of that absti- 
nence which is essential to secure their economic 
existence, and that marginal " utility " which di- 
rectly measures the economic importance attached 
to them by borrowers. 

The case of fixed capital is thus plainly seen to 
be on all fours with the other factors of produc- 
tion with regard to the conditions of value, and 
the determination of price. 

The case of loans which take shape as circulat- 
ing capital, or as commodities for present consump- 
tion, present at first sight a somewhat different 
aspect, and have misled many economists into 
adopting a special explanation of value and price 
of the use of capital. 

Instead of taking the loan of a house or a 
machine, let us now consider the loan of capital 
which takes shape in material of manufacture, 
fuel for generating manufacturing power, or goods 
which form the stock in trade of a business. Do 
these conform to the same conditions as fixed 
capital ? Do they possess, as capital, continuous 
existence, and can objective net productivity be 
imputed to them? At first sight one is disposed 
to give a negative answer to both these questions. 
" Circulating " capital, in the very terms of its 
most common definitions, ceases to exist after a 
single use ; the raw cotton once spun is no longer 



BARGAINS FOR THE USE OF CAPITAL. 239 

raw cotton but yarn ; the coal once burnt ceases to 
function as coal; the shop goods once bought by a 
customer now only possess economic existence as 
consumptive wealth. But this superficial view dis- 
appears before a more exact conception of indus- 
trial order. In the case of the labourer, the mere 
fact that the material fabric of his body is con- 
tinuously worn out in the course of his working 
life, each particle of tissue being wasted and 
replaced by another particle, does not impair our 
conception of the identity and the continuous 
existence of this fund of labour-power. In the 
case of a building or a machine we are ready to 
admit that the conservation of its identity does 
not depend upon the fact that all or any of its 
original material structure remains intact ; in the 
long course of wear and repair every particle of 
the original house or machine may disappear, and 
yet we rightly recognise the continuous existence 
of the capital it embodies. Now there is no real 
or essential difference in this respect between 
fixed and circulating capital ; in the latter case 
the change of the matter which represents the 
capital is more rapid and more regular, that is all. 
Just as a loan of capital, wliich takes shape as 
a machine or a house, is kept in continuous 
economic existence by replacement and repair of 
wasted matter, so in the case of the capital which 
takes shape as coal to feed an engine or to heat a 
house. In the case of the latter as of the former, 



240 THE ECONOMICS OF DISTRIBUTION, 

there is continuous waste (or " consumption " if 
this ambiguous term be preferred), and continu- 
ous replacement : the particular matter which 
represents the capital is in incessant flux. 

This is the true explanation of the mystery which 
Bohm-Bawerk affects to find in the attribution of 
" continuous use " to perishable goods. " It had to 
be discovered that a hundredweight of coal can be 
burnt to cinders on January 1, 1888, and yet be 
' used ' uninterruptedly throughout the whole year,, 
and, perhaps, for five, ten, or a hundred years to 
come; and what is best of all, that this lasting 
use can always be bought for a particular price, 
although and after the coal itseK, and the right to 
consume it to the last atom, has been given away 
for another and a different price." ^ The "fiction" 
which Bohm-Bawerk claims to be the animating 
principle of this theory is only a "fiction" if con- 
tinuous existence and continuous use were claimed 
for the same material embodiment of a hundred- 
weight of coal. But no such claim is preferred. 
The economic continuity achieved by replacement 
shifts the " capital " contained in the hundred- 
weight of coal to a second, and a third, and an in- 
definite number of hundredweights of coal, which 
are the legitimate economic representatives and 
successors of the first hundredweight and may 
well survive for ten or a hundred years. So long 
as the owner of the original hundredweight of 

1 Positive Theory, p. 287. 



BARGAINS FOR THE USE OF CAPITAL. 241 

coal which was loaned stands out of his property, 
his abstention is a legitimate economic cost, which 
force preserves in economic existence and use a 
hundredweight of coal or some other industrial 
representative of it. 

This is no fiction, but an important fact, the 
understanding of which is essential to a compre- 
hension of the working of modern industry. A 
manufacturer maintains his stock of raw materials 
or of fuel in the same way in which he maintains 
his fixed capital, though his mode of book-keep- 
ing may suggest a difference. Out of the gross 
receipts from his sales he replaces the one as he 
replaces and repairs the other. Or take the stock 
of a retail store which does a regular trade, the 
same quantity of the same kinds of wares will 
constantly be there. The tobacconist's furnisher 
who supplies on credit a small retail store, has 
precisely the same claim to receive continuous 
interest for that part of the capital wliich is in 
cigars and pipes, as for that which takes the shape 
of shop furniture and fixtures: the one is just as 
permanent as the other, as cigars and pipes are 
sold they are replaced by fresh orders just as the 
fittings or furniture are replaced when they are 
damaged or worn out. The claims of objective 
capital to continuity of existence depends not 
upon continuity of substance, but of economic 
form. This continuous existence of so-called 
circulating capital also implies a continuous objec- 



242 THE ECONOMICS OF DISTRIBUTION. 

tive productivity which corresponds to that which 
we discerned in fixed forms of capital. As a 
machine continuously working is continuously 
productive, so with the fuel which furnishes its 
mechanical energy: when we recognise that the 
existence of the fuel, as capital, is not dependent 
on the permanence of any particular particles of 
coal, we perceive that its use is continuously pro- 
ductive of wealth, taking shape in the goods that 
are manufactured by the machine. The same 
must be said of the raw materials themselves 
which, by the operation of machinery, are taking 
serviceable shapes ; they, too, are functioning 
productively in industry, and that productivity 
is continuous so long as the supply of materials 
which represents that form of circulating capital 
is maintained. 

Loans of commodities for which interest is paid 
are often instanced in triumphant refutation of 
the alleged need of objective productivity of 
capital.^ A loan of corn for purposes of present 
food, a loan of wine drunk as soon as it is bor- 
rowed — these things may form sources of the 
payment of continuous interest, though continuous 
existence and productivity cannot be imputed to 
them. What are we to say of such cases ? We 
do not need to evade the issue by urging, as Bohm- 
Bawerk, who raised the difficulty, enables us to 

1 Cf. Bohm-Bawerk, Capital and Interest, pp. 214-259. 



BABGAINS FOE THE USE OF CAPITAL. 243 

do, that such loans are not loans of capital^ and 
that what is paid for their use is not true interest. 
The fact is that, if the corn lent is used to sustain 
productive energy of labourers, so as to enable 
them to produce more corn and out of this pro- 
duce to repay capital and interest, the case is on 
all fours with that of capital which functions as 
fuel or as raw material, though it may for con- 
venience be best to exclude consumptive goods 
from ranking as economic capital ; the real source 
and justification of interest is identical in the two 
cases. 

But what of the loan of wine which is drunk 
as soon as borrowed, and cannot be regarded 
as " consumed productively " ? Whence comes 
the continuous interest that must be paid for this 
loan so long as it remains an undischarged debt ? 
No continuous use and no objective productivity 
appears here. How, then, can interest arise ? 
The answer is that, if this case be taken by itself, 
interest cannot arise at all, and the fact that it 
cannot be paid is seen to rest upon the non-pro- 
ductivity of this loan. Bohm-Bawerk, who ad- 
duces this instance to refute the supporters of use 
and productivity as the source of interest, is really 
hoist with his own petard, for he cannot show 

1 "Consumptive goods are not means of production; they 
are therefore not capital ; and the advantages which they con- 
fer do not proceed from any productive power they possess." 
(^Positive Theory of Capital, p. 272.) 



244 THE ECONOMICS OF DISTRIBUTION. 

in such a case that the interest paid for the drunk 
wine arises from a " ripening of future into present 
goods" as his theory demands. In point of fact 
the instance is invalid. No true interest can be 
paid for such a loan ; if money interest is paid, it 
is derived from the productivity of some other 
factor of production. The case has no bearing 
whatever on the theory of interest. The rent of 
a piece of land must be paid even by a farmer who 
is losing money, but we cannot on such a ground 
deny that productivity of nature is a necessary 
condition of payment of rent. If a borrower mis- 
applies his capital, or converts it into wasteful 
forms, he must pay that rate of interest which is 
determined by the condition of its most effective 
and productive economic use. If a piece of capital 
is squandered, the interest must be paid out of the 
productivity of some other piece of capital or some 
other factor of production. If none such is avail- 
able, cadit qucestio, the interest cannot be paid at 
all. 

§ 5. I have found it necessary to dwell at length 
upon this matter and to illustrate from the several 
kinds of capital, because it appears to be thought 
by many that modern representatives of the Aus- 
trian School, Bohm-Bawerk in particular, have 
destroyed the theory which would rank interest 
with other payments, and have established a sepa- 
rate origin and nature for this source of income. 
Bohm-Bawerk has, at the close of his " Positive 



BARGAINS FOE THE USE OF CAPITAL. 245 

Theory of Capital," ^ challenged economists to 
prove the existence of an " ' enduring ' use of per- 
ishable goods, for which interest is supposed to be 
paid." 

I claim, here, to have met this challenge and to 
establish the " enduring use " and the enduring 
objective productivity of the various forms of 
capital as the source and the fundamental condi- 
tion of the payment of interest. By showing the 
economic provision for continuous replacement of 
the matter in which a stock of " perishable goods " 
is at any given moment embodied, I have removed 
the difficulty which beset most of the older theo- 
ries of dependence of interest upon productivity .2 

1 p. 295. 

2 Bohm-Bawerk, in dealing with the arguments by which 
Knies defends the view that interest arises from a durable use 
in perishable goods, attempts to turn his opponent's position by 
argumenta ad ridiculum which utterly evade the issue. Admit- 
ting (p. 289) that "in a certain point of view the individual 
goods replaced may be looked upon as if they were actually the 
same individual goods which were given away in the loan ; they 
have identically the same effect on the economical position of 
the lender who receives them," he affects to deny that herein 
is any evidence of " continuous use " or " productivity." One 
might, he thinks, "as well use the identity of perishable goods 
to prove that oysters will keep fresh for ten years." It is, he 
insists, really "a question which must find its answer in con- 
sidering the nature of the perishable good and the nature of the 
use." But "the nature of the use" is precisely what Bohm- 
Bawerk does not consider. Had he done so he would have 
perceived that the "nature of the use" is such that the eco- 
nomic consumption of a perishable form of capital replaces it 



246 THE ECONOMICS OF DISTRIBUTION. 

Interest is paid out of an increased product 
whose existence requires the presence and ser- 
vices of capital. But this increased product does 
not necessarily constitute interest, nor does it pro- 
vide a measure of the value of the use of capital. 
A new machine introduced into a trade might 
double the output, but of course it by no means 
follows that the profit obtained by the owner of 
the machine corresponds to the value of half the 
increased output, still less to the value of the 
whole of the earlier output. If the machine 
were an absolute monopoly, its owner could 
hold, against the encroachments of labour on 
the one hand and the consumer on the other 

by another form, and in addition yields a surplus whicli is 
destined to figure as interest. This surplus (a net Nutzung) 
arises from that productivity of use of capital which Bohm- 
Bawerk simply denies, but the non-existence of which he fails 
to prove. He boldly asserts (p. 291) in following up KJaies that 
" the enjoyment of effects indirectly obtained from the con- 
sumption of goods is not in the least a utility which we get 
in addition to the consumption, it is just the utility we get 
from the consumption," i.e. the consumption of a ton of coal 
cannot be productive in the sense that it not only yields a value 
enabling another ton of coal to replace it, but a surplus value 
which figures as interest. Whether Knies is technically right 
or wrong in his account of the indirect services arising from this 
consumption, we have seen that the economic consumption of a 
ton does yield a surplus over and above the ton which shall 
replace it. Without such surplus we shall presently see there 
exists no objective fund for payment of interest which is thus 
thrown back upon a subjective fund that is impotent to explain 
real interest. 



BARGAINS FOR THE USE OF CAPITAL. 247 

hand, the whole of the increased product, at a 
value only lower than the value of the former 
output by such fall of price as he deemed desir- 
able to allow, in order to increase the sale of 
goods to the point which would yield the maxi- 
mum aggregate of net profits. But where the 
machine is no monopoly, the competition of other 
capitalists may oblige him to hand over part of 
the increased productivity to consumers in large 
reductions of price, or to labour in much higher 
wages, receiving only a minimum profit which has 
no fixed or directly assignable relation to the in- 
creased productivity. 

§ 6. The amount of the profit or the value of 
this use of capital will, according to utility theo- 
rists, be dependent, not upon the productivity of 
each separate machine, but upon the subjective 
utility imputed to the " marginal " machine, that 
which is least effectively applied. 

Needless to say, I reject this assertion that the 
price and value of the use of capital is determined 
by final utility. Utility and productivity are 
essential conditions of interest, and interest may 
be rightly regarded as paid out of increased pro- 
ductivity; but the amount or proportion of the 
added productivity required for profit is not to 
be determined by confining attention to the util- 
ity of capital.^ 

But a complete presentment of interest as a 
1 This is Von Wieser's mistake in Natural Value. 



248 THE ECONOMICS OF DISTRIBUTION. 

case of the general law of price requires not 
only that the capital shall be coordinated with 
other factors of production in relation to utility 
and productivity, but also in relation to cost. If 
the use of capital is what is sold and paid for by 
interest, how are we to describe the " cost " from 
which a price proceeds helping to determine that 
price ? 

§ 7. No novel answer is required. Abstinence 
still seems to me the best term to describe the^ 
human effort which enables capital to be produc- 
tive. Misunderstanding upon this theory of ab- 
stinence as a cost arises from two sources : first, 
as to the nature of the abstinence; second, as to 
the economic position of those who practise it. 

Upon the nature of abstinence early economists 
expressed themselves ambiguously. The absti- 
nence which enables capital to function does not 
consist in the original determination which leads 
a saving person to abstain from making what he 
can enjoy at once, in order to make something 
which cannot be at once consumed, but which is 
of service in production. That initial act is only 
the beginning of the effort of abstinence. That 
effort, or " cost," must be considered to be going 
on all the time that capital is utilized ; the owner 
of this capital must be conceived as exercising 
a self-restraint which enables him to resist the 
temptation to substitute for his capital a fund of 
present enjoyment. This effort, moreover, need 



BAUGAINS FOR THE USE OF CAPITAL. 249 

not be regarded as a purely negative action ; the 
effort of self-restraint is as positive as any other 
effort, and indeed has its psychical and physical 
measurements, like the efforts which go out in 
present labour-power. This effort of abstinence 
is not, indeed, to be regarded as the efficient cause 
of the productivity of capital ; we cannot say in 
so many words that abstinence is productive, but 
this continued effort is plainly to be regarded as 
keeping capital in continuous economic life. If 
that abstinence fail and owners demand instant 
enjoyment, capital lapses, and its services are 
withdrawn. Professor Marshall, I think, does 
wrong to compromise the view by substituting 
"waiting" for "abstinence." The human sub- 
jective cost is the self-restraint implied by absti- 
nence ; the self-restraint as a psychical process 
involves waiting, and waiting is but the imme- 
diate condition which enables capital to operate 
productively. 

Precisely the same relation exists between ab- 
stinence and the utility of capital which exists 
between labour and the utility of commodities. 
Philosophically, abstinence is to be regarded as a 
form of human economic " cost " referable to some 
common denominator with labour-power, and paid 
for its sacrifice upon the same scale. Interest 
from this point of view must be regarded as a 
wage of abstinence. Abstinence must be regarded 
as a form of painful effort voluntarily incurred by 



250 THE ECONOMICS OF DISTRIBUTION. 

individuals, paid for in interest out of a product 
which owes its existence to the incurring of the 
effort. 

To some this is a " hard saying," which they 
seek to deny, either by pointing to a possible 
order of society in which individuals would not 
be called upon to practise abstinence, or by allu- 
sions to the Duke of Westminster and others 
whose abstinence involves no effort, but consists 
in a refusal to incur the positive discomfort of 
increasing their consumption after all felt wants 
are fully satisfied. 

But neither of these objections is really sub- 
stantial. The substitution of collective for indi- 
vidual saving would not really do away with 
abstinence or even with the painful cost of it; it 
would always be more pleasant, and perhaps more 
immediately profitable, to a society to convert an 
undue proportion of its energy into immediately 
consumable goods, and so to make inadequate pro- 
vision for the future. A rational society resisting 
the temptation and making due provision for 
future production must be held to practise absti- 
nence and self-sacrifice analogous to that practised 
by the individual now. In the administration of 
such a coUectivist society, no particular portion 
of the increased wealth due to this provision 
might be classed as interest ; the need of the old 
terminology might have passed, but the thing 
itself, the "interest," would be there. 



BARGAINS FOR THE USE OF CAPITAL. 251 

So also, under an individualist dispensation, as 
long as the abstinence or postponement of gratifi- 
cation on the part of any of those required to 
contribute to the supply of capital involves a sac- 
rifice, interest must remain. If, as some suppose, 
a time might come when a sufficient number of 
savers might consent to abstain in order to con- 
sume more serviceably in the future the same 
quantity or even a less quantity of goods, interest 
in any positive shape might indeed be abolished ; 
for if abstinence involved no painful effort, hovt^- 
ever much it might be serviceable in producing 
wealth, it would receive no pay ; it would be 
among the bounties of nature which have no 
value. 1 

The fact that the Duke of Westminster suffers 
no painful effort in saving, of course is beside the 
point for all who have considered that waiting, 
like all other " costs," must be measured from the 
marginal saver, and not from the saver whose 
saving comes easiest. A large, an unduly large, 
proportion of saving is performed by those whose 
abstinence involves no pain or appreciable loss of 
present enjoyment. Even the self-restraint of the 
ordinary well-to-do saver may not greatly reduce 
his current rate of enjoyment. But the total sup- 
ply of capital employed in industry certainly con- 

1 Subjective interest even then would not disappear. For a 
discussion of the question, "Is objective interest necessary?" 
see Appendix at the close of this chapter. 



252 THE ECONOMICS OF BISTBIBUTION. 

tains some portions whicli are the result of a real 
considerable sacrifice of present comfort. Not 
only the superfluous income of the Duke of West- 
minster, but some of the hard-won earnings of 
John Smith of Oldham, are required to contribute 
to the aggregate supply of capital. Now, while 
the Duke might, and probably would, consent to 
do his saving even if no interest was paid for its 
use, John Smith probably would not consent. So 
long as John Smith must receive 2^% in order 
to evoke the genuine effort of abstinence, the 
Duke must get the same payment for his formal 
abstinence. It is economically necessary to pay 
the Duke at the same rate at which we pay John 
Smith, because, in the investment market, as in 
any other market, there can only be one price 
for the whole supply, that price measuring either 
the cost of producing that portion of supply which 
is produced most expensively, or the utility af- 
forded by that portion of supply. The relation 
between the cost of production to John Smith, and 
the utility of the portion of capital which he fur- 
nishes, determines the rate of profit. If it seems 
unjust that the Duke of Westminster should be 
paid for no actual effort or sacrifice incurred, we 
must bear in mind two facts. First, our analysis of 
the operation of bargaining has shown that the 
distribution of gain in a bargain is not based on 
any moral principle of distributive justice. The 
injustice apparent in the payment of interest is 



BARGAINS FOR THE USE OF CAPITAL. 253 

also found in the payment of wages. A strong- 
bodied labourer, who finds his work easy to per- 
form, is paid as much as a weak-limbed labourer 
who gives out a far more painful effort in the 
performance of the same task. The first hour 
of the working day, which may be nothing else 
than a pleasurable exercise, is paid for at the same 
rate as the last hour, which is exhausting and 
injurious. So with saving, the effort of the mar- 
ginal saver, not of the other savers, is the deter- 
minant of profit from the cost side of the equation. 
§ 8. " But," it may be further pressed, " the 
analogy with labour is not complete, the labourer 
whose labour is easiest at any rate gives out some 
personal exertion; but the capitalist whose sav- 
ings are only the self -accumulation of excessive in- 
come does nothing at all. " Now this statement is 
indisputable, but the attack it suggests is misdi- 
rected when it is applied to impugn the principle 
of interest. The real gravamen of the charge, 
against those whose interest is unattended by any 
" cost " of abstinence, has reference, not to the 
payment of interest, but to the modes by which 
they have come into possession of the capital. In 
other words, the frequent assertion that " the real 
abstinence is of the worker and not of the capi- 
talist," does not meet the point at issue. Sup- 
posing it be true that the capitalist steals from the 
worker a portion of the product and uses it for 
capital, receiving interest for its use, a true bill of 



254 THE ECONOMICS OF DISTRIBUTION. 

indictment against him would rest, not upon the 
wrongful receipt of interest, but upon the prior 
act of stealing the product of labour. If the in- 
justice of paying interest to those who have earned 
it by no effort be admitted, that injustice has no 
special reference to bargains for the use of capital, 
but must be located chiefly in prior bargains for 
the sale of labour-power, or in other bargains 
where the capitalist enjoys a superior power of 
bargaining. Those who hold that capitalist em- 
ployers forcibly extort from their workers a sur- 
plus value, weaken their case when they enter a 
specific attack against the payment of interest for 
this surplus value after it has taken the form of 
capital. 

The economic necessity of interest and the law 
of its payment is not really affected by the fact 
that some of the capital for which interest is 
received may have come wrongfully into posses- 
sion of its owners. 

§ 9. I claim by this argument to have shown 
that the price of the use of capital, called interest, 
is determined in the same way as the price of a 
commodity in a market, i.e. by the establishment 
of a relation between two bargainers, one repre- 
senting final or marginal cost, the other final or 
marginal utility. Abstinence and productivity 
must be admitted each to contribute toward de- 
termining the economic importance attached to 
the use of a piece of capital. 



BABGAiyS FOR THE USE OF CAPITAL. 200 

§ 10. According to this treatment, interest, the 
price of capital-use, is determined like every other 
market-jjrice. There are, however, certain rea- 
sons, other than those already named, which have 
helped to remove the consideration of interest 
from the general treatment of prices, and to apply 
to its determination special laws and sjjecial ter- 
minology. Both economists and moralists have 
treated interest as a payment distinct in kind from 
other payments. And it mnst be admitted that 
certain conditions which apply to capital seem to 
sever it naturallv from other articles, the use of 
which is bought and sold. 

In the first place, until quite recent times in all 
countries, and even now in all save the most de- 
veloped countries, most loans of capital were not 
for industrial purposes, but for consumption or 
for some pressing temporary emergency. The 
conditions of such loans have generally been far 
removed from market competition of the kind 
with which we have been dealing. The necrotia- 
tions of the money-lender with his client give to 
the element of force or monopoly power a far 
larger place than is commonly accorded in bargain- 
ing. The practice of usury has thus been strongly 
dissociated from ordinarv dealincrs. and still vields, 
even in advanced industrial communities, the most 
striking instances of forced gains in the deter- 
mination of a price. The lender has, from the 
very nature of the case, so powerful an advantage 



256 THE ECONOMICS OF DISTRIBUTION. 

over the borrower, that both economics and ethics 
have been habituated to treat such bargains as a 
thing apart. But though the balance is commonly 
so ill-adjusted for these bargains, they are not 
intrinsically different from other bargains where 
competition among sellers is closely restricted. 

Again, when we turn to industrial capital, we 
find that in most countries the great bulk of this 
capital is used by its owners, and its profit is not 
reckoned apart from the wages or the earnings of 
management of a worker or an employer. The 
proportion of savings which have been used for 
investment outside the business of the owner has 
been quite small until recent times, and many such 
investments are determined by other than purely 
competitive conditions. 

Thus the conception of a fluid-market for the 
investment of money in which two-sided competi- 
tion exists, and where the lender cannot be deemed 
to have any natural advantage over the borrower, 
is of quite modern growth, and has not yet dis- 
placed the conception of capital and interest asso- 
ciated with the old order of things. 

But in so far as the use of capital is the object 
of a sale, whether on the older terms of usury or 
in modern investments, the price is determined, 
like the price of commodities, by the bargainers, 
who represent final cost and final utility : the 
supply of the use of a particular form of capital is 
subject to the same laws determining its increase 



APPENDIX TO CHAPTER VIII. 257 

or decrease as the supply of land, or of labour, or 
of goods. 

APPENDIX TO CHAPTEE VIII. 

Is Objective Interest Necessary ? 

There are those who think that even at the present 
time objective interest is unnecessary as a stimulus to 
saving, or, in other words, that there is no economic 
cost in saving which requires a reward represented by 
an objective increase in the quantity of goods returned 
by the borrower. According to these thinkers, inter- 
est is maintained by the option which an investor has 
of buying land and drawing rent (H. George), or by 
the further option of getting hold of a limited and 
legalised '' monopoly," money, and extorting usury for 
its loan (M. Fliirscheim). If land and money were 
removed from the field of investment, interest, they 
maintain, would disappear. Those who hold this view 
seem to me to weaken their case by limiting to land- 
owning and money-lending the forms of investment 
which support a positive interest. All other industries 
which, by reason of the enjoyment of legal protection, 
dependence upon land-use, or restricted competition, 
due to purely economic forces, are enabled to tax the 
consuming public, will, in as far as they are open to 
investment, stand in the same position to support in- 
terest as land and money. But if these forms of 
protected industry were withdrawn from the field of 
private investment, would interest disappear, or, in 
other words, would the marginal saver lend without a 
larger return ? 



258 THE ECONOMICS OF DISTRIBUTION. 

ISTo direct or general answer can be given. Tlie 
question of the influence of reduced interest on saving 
is often discussed as if tlie motives of the saver were 
the only determinant. This is not so. The relation 
of the motives of the saver to the amount of savings 
socially required is the problem. It is a particular 
case of " value/' involving, as does every other case, 
consideration of the relation of marginal cost to mar- 
ginal utility. 

Saving is due (1) partly to the self-accumulation of 
surplus incomes not needed to satisfy any demand iox, 
current satisfaction. A fall of interest, even to zero, 
or below, might not appreciably affect this saving; 
(2) partly to a desire to provide against old age, or 
other infirmities, or to support a family. Saving 
for such purposes is probably stimulated by a fall 
of interest. If it is intended to expend the capi- 
tal sum of the savings for these purposes, the rate 
of interest will not have an important^ influence as 
motive, but so far as it operates, a high rate will check 
saving by enabling a somewhat smaller amount of sav- 
ing, accumulating at interest, to achieve the desired 
result. If, on the other hand, it is intended to make 
provision, not by expending the capital, but by using 
the income from that capital, a low rate of interest is 
likely to evoke more saving because a larger capital 
will be required to yield the necessary income. 
Against this, however, must be set the consideration 
that, if interest is so low that the task of accumulating 
by saving suf&cient capital to furnish it becomes too 
difficult, or quite impossible, such saving will not be 
undertaken. But when we remember how much saving 



APPENDIX TO CHAPTER VIII. 259 

is often done in primitive industrial societies for these 
purposes, and how much more would be done if politi- 
cal and social conditions were such as to protect these 
savings effectively, we shall be inclined to conclude 
that a fall of interest is more likely to increase than 
to reduce the aggregate of savings for purposes of 
definite future expenditure. 

(3) Savings are made by men of substance engaged 
in industry, in order to extend their business, or gener- 
ally to improve their financial position. In such cases 
it is reasonable to hold that a high rate of interest will 
stimulate saving. For, in the first place, the interest 
upon capital, already in existence, must be regarded 
as the portion of income out of which the largest pro- 
portion of savings can be most easily made. Where 
interest is high, the proportion of the general income, 
which admits easily of saving, will be large. In spite 
of the maxim "lightly earned, lightly spent," it is 
reasonable to expect that a rise in the aggregate of 
interest, or of any portion of income not earned by 
direct labour, will be attended by an increase of sav- 
ing. When a temporary rise of interest takes place 
during some industrial boom, most careful business 
men will try to reap a golden harvest while they 
can, by using their abnormally high profits to extend 
their businesses. A temporary, and even a normal and 
gradual, fall of interest will reduce this sort of 
saving. 

Most economists,^ admitting the contrariety of mo- 

1 This was not true of early economists, cf. Webb, Indus- 
trial Democracy^ Vol. II, p. 622, etc. Mr. and Mrs. Webb, 
however, are wrong in their interpretation of the view of Senior 



260 THE ECONOMICS OF DI8TBIBUTI0N, 

tives, incline to the belief tliat on tlie whole a fall of 
interest checks saving. But is this true ? 

If the Duke of Westminster, who saves because he 
has a superfluous income, would save no less if interest 
fell, while John Smith of Oldham, who saves in order 
to provide against a rainy day, might save more, is 
it certain that those who save with the more general 
object of making money would so far reduce their 
savings as to bring down the aggregate savings of a 
community below what was needed to furnish the 
industrial capital required to maintain current con- 
sumption, and to provide against increased consump- 
tion in the future ? 

Is it not possible that the automatic saving of sur- 
plus elements of income, and such other saving as 
was stimulated by a fall of interest, would suffice to 
furnish the socially necessary capital ; in other words, 
that the marginal saver might consent to save without 
positive interest? It is at least conceivable. Much 
would depend upon (a) the absolute amount of income, 
(6) the distribution of wealth, (c) the condition of the 
industrial arts, and (d) the nature of consumption. 
(a) Where the income of the community is large, a 
relatively large portion of this income may be taken 
to be applicable to the satisfaction of weaker or less 
urgent current desires. This portion of the income 
of an individual or a class may, it is generally ad- 
mitted, be saved at a low rate of interest. It is not 
so readily admitted that it may be saved at zero or 
minus interest. Professor Marshall writes as if some 

and McCulloch. (Cf. N. Senior, Pol. Econ. 5th ed., p. 140, 
and McCulloch, Fol. Econ., Pt. I, Ch. II, § 3.) 



APPENDIX TO CHAPTER VIII. 261 

objective interest were essential because "the future 
pleasure to be got in return for giving up a present 
one could not be expected to be greater than it^ but 
rather to be less'' (IV, Ch. VII, par. 8). But this 
is by no means true in cases where the present pleas- 
ure given up is a little-valued luxury, and the future 
pleasure placed in its stead is a necessary or an 
important comfort. Professor Marshall here does not 
exhibit the essentially subjective character of the 
problem. A person who has just eaten a loaf will 
consent to postpone the consumption of a second loaf 
which he has in his possession, on condition that a 
loaf or even less is given back to him at a future time 
when he has no bread. For although the utility as a 
future one is discounted, the satisfaction of the future 
consumption of a necessary, when discounted, will be 
greater than the present satisfaction of consuming a 
superfluity. This is why, even in uneducated com- 
munities, money and treasure are laid up in a stock- 
ing. If a man found that he had ten years to live, 
and that his income, £1000 for the first year, would 
be £900 for the second, £800 for the third, and so 
on, he would, assuming his capacity of enjoyment and 
his tastes to be steady, save at zero interest some of 
his higher income in the earlier years when it would 
have been spent in luxuries, in order to spend it in 
comforts during the later years. He would not abso- 
lutely equalise his expenditure over the period, for 
such a course would imply that he did not discount 
future pleasures. The truth is, that, though he values 
a present comfort higher than a similar future com- 
fort, he values a future comfort higher than a present 



262 THE ECONOMICS OF DISTBIBUTION. 

luxury. It is evident from such a case that not merely 
a zero but a negative objective interest is possible, 
because it is consistent with a positive interest which 
forms the human motive of saving. 

(b) The amount and the proportion of a community's 
income which would be saved from such a motive at 
zero interest or less would probably depend upon the 
distribution of wealth, though it is not easy to assign 
any general law for the influence of distribution upon 
saving. At first sight, it would appear as if inequality 
favoured saving, since it would set a larger total incom© 
free for the purchase of superfluities or such luxuries 
as had but a small hold upon the desires of consumers ; 
in other words, a larger proportion of the income of 
the rich might transcend their standard of comfort 
and accumulate as savings. But further reflection 
makes this position doubtful; for though the exist- 
ence of a rich class may thus lead to the saving which 
consists in self-accumulation of superfluous income, 
equality of income would seem to favour deliberate 
saving for old age and other emergencies. For in so 
far as large incomes are drawn from the rent of land 
or profits on investments, such incomes do not lapse 
with old age or personal inability, and there is little 
need for such a man to provide against special emer- 
gencies. On the other hand, in a working community, 
where an approximate equality of incomes existed, the 
largest proportion of the people would be both enabled 
and inclined to save. For the maintenance of a sound 
standard of comfort for themselves throughout life 
and for their family will involve an abstinence from 
present luxuries for the sake of future necessaries or 



APPENDIX TO CHAPTEB VIIL 263 

prime comforts — that kind of saving which, as we 
have seen, least requires an objective interest. 

The total subjective interest of saving is greater 
when the saving is applied to the future provision of 
necessaries, smallest when it is applied to the future 
provision of luxuries. Therefore the aggregate sub- 
jective interest attending a given amount of saving 
would be greater where a larger proportion of it was 
done by poorer persons than where a smaller propor- 
tion was theirs. Thus it would appear that motived 
saving should be larger where distribution was more 
equal. How far this would be offset by the larger 
unmotived saving of a wealthy class is of course 
doubtful. 

(c) Whether the quantity of saving which can be 
induced without objective interest will suffice must, 
however, largely depend upon the character of the 
industry that is practised, or, in other words, upon 
the relative importance of capital as compared with 
the other factors of production. In a simple commu- 
nity, where abundant material wealth might be drawn 
by simple processes from rich natural resources, the 
requisite amount of capital might be evoked without 
interest ; whereas in a country with highly developed 
machine-production, the same quantity of wealth might 
require a much larger capital, some part of which would 
not be brought into economic existence without objec- 
tive interest. 

(d) The importance of capital as compared with other 
factors is not, however, merely a question of the devel- 
opment of the productive arts, though it is sometimes 
assumed that as civilisation advances, capitalism and 



264 THE ECONOMICS OF BISTBIBUTION. 

macliine-productioii must occupy a part of ever grow- 
ing prominence. Much will depend upon the char- 
acter of a progressive nation as expressed in modes 
of consumption. A nation, which is dominated by a 
constant craving for increased quantities of certain 
common forms of material goods, will indeed assign 
an ever increasing relative importance to machine- 
processes and will exercise a correspondingly in- 
creased demand for saving to be stored in material 
forms of capital. A nation, on the other hand, whose 
consumption, beyond a certain standard of common, 
material consumption, grows more qualitative and 
demands the satisfaction of the taste and special 
needs of its individual members, while it employs an 
ever larger proportion of its income in demand for 
intellectual goods, personal services, and other non- 
material forms of wealth, may assign a place of rela- 
tively diminishing importance to material capital, so 
that the requisite saving might be done by those who 
do not require the incentive of objective interest. 

The problem is a highly speculative one, and no 
adequate data exist for attempting a solution, but the 
considerations above stated entitle us to question the 
generally accepted view that the marginal saving 
always requires the stimulus of objective interest. 
In a truly progressive society, where growing fore- 
sight and precaution reduce the discount of future 
utilities, where increased equalisation of incomes en- 
ables a larger proportion of members to lay aside for 
definite future uses, and where a coordinate improve- 
ment in the arts of production and consumption enables 
the production of routine material goods to be more 



APPENDIX TO CHAPTEB VIII, 265 

easily achieved, and consequently a larger proportion 
of purchasing power to be directed to the demand for 
consumables which lie outside of capitalist industry, 
it is quite conceivable, perhaps even probable, that 
the requisite amount of saving could be induced by 
the stimulus of subjective interest alone. 

The question whether private saving can be evoked 
in sufficient quantity without objective interest has 
too often been discussed with exclusive attention to 
the " cost " side, the motives which actuate savers ; 
the influences operative upon demand are often ig- 
nored. But the economic importance or value of the 
marginal capital will be equally affected by forces 
proceeding from both sides, as is the case in any 
other market. 



CHAPTER IX. 

b6hM-BA WEEK'S POSITIVE THEORY OF CAPITAL. 

§ 1. The coordination of capital with nature 
and labour as a factor of production, and of inter- 
est with rent and wages as a price of a use of a 
factor of production, differs so widely from a 
recent theory of interest which has gained much 
acceptance among economists, that it seems only 
fair that I should make a formal investigation of 
that theory and set forth the grounds for denying 
its validity. 

My rejection of the one-sided interpretation of 
the general phenomena of value and price pressed 
by disciples of the "marginal utility" school, 
would necessarily involve a rejection of a theory 
of interest which claims to be an application of 
that same theory of value. The " Positive Theory 
of Capital," however, if it were merely an appli- 
cation of the marginal utility theory of value 
to capital, treated as a productive factor along 
with nature and labour, would require no separate 
consideration ; its strength and weakness would 
be merely those of the general theory. 
' 266 



POSITIVE THEORY OF CAPITAL. 267 

But tlie theory most closely associated with the 
name of Bohm-Bawerk, by refusing at the outset 
the position of a productive agent to capital, in- 
volves an application of " marginal utility " which 
differs widely in its results from its application 
in the case of labour and nature. The " sub- 
jective" elements in determination of value and 
price will be found to be accorded a part essen- 
tially different from and more important than 
that accorded them in other cases of value and 
price. 

§ 2. It will be best to begin by a short presen- 
tation of the cases by which Bohm-Bawerk un- 
folds his theory in his work, the " Positive Theory 
of Capital." 

The simplest case is that of A, the owner of 
£100, who, instead of using it now to buy con- 
sumption goods, lends it to B, with the view of 
receiving it again in a year's time and then using 
it to buy consumption goods. <£100 regarded in 
terms of present consumption goods is more highly 
esteemed than XlOO in terms of consumption goods 
a year hence. Look at XlOO worth of goods a 
year off — they look smaller. They look perhaps 
only as large as £96 worth of present goods. 
Yet as the year passes to its close this quantity of 
utility esteemed at £96 rises to the full £100. 
Thus the lapse of time, bringing future into 
present goods, appears as a natural source of in- 
terest, estimated in this case at nearly X4. In- 



268 THE ECONOMICS OF JDISTBIBUTION. 

terest arises because XlOO in our hands now is 
not the same as £100 regarded a year hence. 

So again the owner of a house or other durable 
form of capital possesses " a sum of future uses 
discounted according to their futurity " (XII) . 
Productive goods (^i.e. raw material of manufac- 
ture, machinery, land) are endowed at the begin- 
ning of the year with a value imputed from the 
utility of the consumption goods they are going 
to make ; but since these goods are not existing 
at the beginning of the year, their value is dis-* 
counted in our estimate of the machinery, etc. 
During the year " future goods " ripen into " pres- 
ent goods," and their increased value recoups the 
original expenditure on capital and yields an 
interest. 

Take the case of a machine thus endowed with 
a six years' life. At the opening of the first year, 
the first year's utility is reckoned at 100. But 
the total utility of the machine does not stand at 
600, because its utility for the subsequent years 
is estimated lower than for the first year. Let 
the discount for the second year be 5% on the 
estimate of the first year, and let the same rate 
of discount be applicable to each following year. 
Then the total utility viewed from the beginning 
of the first year will be 100 + 95.23 H- 90. 70 
+ 86.38 + 82.2T 4- 78.35 = 532.93. 

At the beginning of the second year, each year's 
valuation according to the first year's estimate 



POSITIVE THEORY OF CAPITAL. 269 

will have moved one step forward ; the second 
year upon last year's estimate, which was worth 
95.23, has now become the first year and is worth 
100 ; similarly with each succeeding year. 

The total utility at the beginning of the second 
year will therefore be 100 + 95.22 + 90.70 + 86.38 
+ 82.27=454.58. In other words, the valuation 
of the sixth year is knocked out, there being now 
no sixth year. At the beginning of the third 
year a similar forward movement of each year's 
value takes place, the former fifth year having 
disappeared. The total utility is now 100 + 95.22 
+ 90.70 + 86.3 = 372.31. Similarly in the three 
succeeding years, wliile he enjoys a current utility 
of 100, the estimate of the total utility of the 
machine is reduced by a less amount. 

In other words, during the first year he has 
realised a service worth 100, but taking stock at 
the end finds he has lost only 78.35, because the 
value represented by all the remaining years has 
advanced. 

At the beginning of the fifth year he has left 
100 + 95.23, during the year he gets a service 
worth 100, but at the, end finds he still possesses 
100, and so has only lost 95.23. 

For simplicity, a definite life has been here 
assigned to the machine, and so the amount of 
what may be called "gross interest" is different 
in the different years. If, however, a perpetuity 
of life be secured for the machine, by means of a 



270 THE ECONOMICS OF DISTRIBUTION. 

fund for depreciation, it will easily appear that, 
while the sum of the series of valuations now 
reaches infinity, the net interest for each year will 
be the same. 

In Bohm-Bawerk's words, " The cause of net 
interest "is "an increase of value of the future 
services, which were previously of less value, but 
during the period of the goods' use have pressed 
forward into or toward the present."^ 

§ 3. This brief statement embodies the essenc§ 
of Bohm-Bawerk's teaching set forth at length in 
his work, the "Positive Theory of Capital." His 
chief points of divergence from the treatment 
given in the last chapter may be stated in three 
propositions, which I will first explain and after- 
ward discuss. 

1. Interest is not the price of the use of capital, 
but the price of the purchase of present goods in 
terms of future goods. ^ The underlying fact is 
this, that "present goods are, as a rule, worth 
more than future goods of like kind and number " 
because, other things equal, present satisfaction is 
valued higher than future satisfaction. A man 
who has not present goods may buy them from 
another man who has them, but he must pay for 
them in a larger quantity of future goods. If the 
loan is of money, " the borrower will purchase the 

1 Positive Theory of Capital, p. 346. 

2 pp. 285, 286. Introduction, p. xx. 



POSITIVE THEORY OF CAPITAL. 271 

money which he receives now by a larger sum of 
money which he gives later. He must thus pay 
an 'agio' or prsemium, and this 'agio' is interest. 
Interest then comes in the most direct way, from 
the difference in value between present and future 
goods." ^ What is sold, i.e. present goods, forms 
the subject of a single act of purchase, though the 
future goods paid for it are usually paid in instal- 
ments at regular intervals over a term of time. 
The annual interest, together with the principal 
repaid at the end of the term of borrowing, forms 
the single price of the present goods. 

2. Bohm-Bawerk denies that the objective or 
" technical " productivity of capital is essential 
to the emergence of interest: the subjective 
" productivity " which consists in the ripening of 
future into present goods is deemed sufficient to 
provide a fund for the payment of interest. 

In the elaboration of his " Positive Theory," 
Bohm-Bawerk has given so much space and skill 
to proving and illustrating the nature of the 
technical productivity of capitalism that it is 
likely that many of his readers do not clearly 
understand that his technical productivity is not 
essential to his theory of interest. The most 
serviceable portion of his work consists in the 
analysis and explanation of the processes of 
" roundabout production " with the object of prov- 
ing the technical productivity of these processes. 

1 p. 281. 



272 THE ECONOMICS OF DISTRIBUTION. 

This objective productivity — the increased quan- 
tity of forms of wealth due to "roundabout" 
methods — is both an incentive and a reward of 
saving. It is one reason for postponing present 
consumption that you are thereby enabled to have 
more goods to consume in the future. 

But from the examples we have given above, 
and from the express statements of Bohm-Bawerk 
himself, it is made manifest that interest does not 
depend upon or require such objective produc-^ 
tivity. The one essential feature, according to 
his teaching, is the undervaluation of future as 
compared with present goods. Objective or tech- 
nical productivity is only one factor of this under- 
valuation, and it is not indispensable. There are 
three factors of this undervaluation, each of which 
is, according to Bohm-Bawerk, by itself sufficient 
cause for a difference in the value of present and 
future goods, and an adequate reason why interest 
should be paid. These factors are " the difference 
in the circumstances of provision between present 
and future, the underestimate due to perspective, 
and, finally, the greater fruitfulness of lengthy 
methods of production." ^ 

§ 4. The first factor has reference to the real 
services or satisfaction which the same goods 
would yield now as compared with what they 
would yield at some future time, and is con- 
cerned with comparative capacity of enjoyment 
1 Positive Theory^ p. 272. 



POSITIVE THEOBY OF CAPITAL, 273 

and comparative wealth at the two periods. The 
second refers to the rate at which the same amount 
of real services will be discounted by forethought 
or intelligence. The third factor corresponds to 
what is generally called "productivity of capi- 
tal." It is, however, right to record the fact that 
Bohm-Bawerk persistently repudiates the expres- 
sion "productivity of capital" and refuses to 
identify with it the factor which he denominates 
"the greater fruitfulness of lengthy methods of 
production." The significance of this "greater 
fruitfulness" of capitalism consists, according to 
him, in "the technical superiority of present 
goods" rather than in the greater quantity of 
products which arises from the productive use 
of "present goods." The chapter in which this 
" technical superiority of present goods " is un- 
folded is the most difficult portion of his treat- 
ment, not from any obscurity in the texture of 
the reasoning, but from the perversity with which 
he labours to assign to time the productive power 
commonly attributed to capital. He proposes at 
the outset to substitute for " productivity of capi- 
tal" what he terms ^'the facts." "These facts 
are as follows : that, as a rule, present goods are, 
on technical grounds, preferable instruments for 
the satisfaction of human wants, and assure us, 
therefore, a higher marginal utility than future 
goods." 1 From the elaborate explanation which 

1 p. 260. 



274 THE ECONOMICS OF BISTBIBUTION. 

follows, this sentence appears to mean that a given 
quantity of forms of capital or other productive 
means in our possession now is superior both in 
marginal utility and in value to the same quan- 
tity to be possessed a year hence, because the 
productivity of long-period production begins 
earlier and is represented at any given time in 
the future by a larger quantity of goods. This, of 
course, is quite consistent with the ordinary view 
of productivity of capital ; capital which begins 
now to be applied productively will be repre- 
sented by a larger amount and a larger aggregate 
value of goods in five years' time than the same 
amount of capital which only begins to function 
one year hence. The difference, however, be- 
tween Bohm-Bawerk and the ordinary "produc- 
tivity " economist is, that the former seems to 
insist that the increased quantity of goods and 
of value is due to a priority of time and not to 
a productive use of the material forms of capital. 
To this issue I shall presently return. It is here, 
however, enough to point out that the third factor 
to which Bohm-Bawerk alludes is virtually a pro- 
ductivity of capital, though his explanation of 
"the greater productiveness of lengthy methods 
of production" assigns the efficient causality to 
the length of time rather than to the " use " or 
the " productive consumption " of the forms of 
capital. However we explain it, this third factor 
does yield an objective fund of wealth from which 



POSITIVE THEORY OF CAPITAL, 275 

objective interest can be paid. If, then, this third 
factor were essential to all functioning of capital 
and all payment of interest, Bohm-Bawerk's theory 
would at any rate contain an objective fund of 
productivity. But he denies explicitly that this 
third faculty is essential, for he affirms that " each 
of the three factors, independently of the others, 
is adequate to account for a difference in value 
between present and future goods in favour of 
the former ; " ^ and this undervaluation of future 
goods is continually put forward as the essence 
of the problem of interest. In other words, the 
change in human subjective valuations, which 
takes place when the passage of time ripens future 
goods into present goods, is assigned as in itself a 
sufficient explanation of the payment of a sum of 
objective goods in interest. 

That Bohm-Bawerk does not deem the produc- 
tive use of capital to be essential to the emergence 
of interest is further attested by his treatment 
of saving and abstinence. Of "saving," he says 
that "it has its place, not among the means of 
production, but among the motives of production 
— the motives which decide the direction of pro- 
duction." 2 Now, if our reasoning in the last chap- 
ter is correct, we have shown that saving not only 
determines the direction but the amount of pro- 
duction, in that it enables an increased productive 
power to function in industry. This denial of sav- 
1 p. 273. 2 p. 123. 



276 THE ECONOMICS OF BISTBIBUTION. 

ing as a means of production is implicitly and 
necessarily a denial of the productivity of capital. 
The plainest denial of the productivity of capi- 
tal, however, is conveyed in Chapter III where, 
putting the question " whether capital is a third 
and independent ' factor of production ' alongside 
of labour and nature," he says "the answer must be 
a most distinct negative. "^ "Capital has, first, a 
symptomatic importance. Its presence is always 
the symptom of a profitable roundabout produc- 
tion. I say, deliberately, 'symptom,' and not 
' cause ' or ' condition ' of profitable methods of 
production ; for as a fact, its presence is rather 
the result than the cause. "^ From the context it 
is evident this means not merely that some pro- 
duction can be carried on without capital, and that 
in this sense capital cannot rank on an equality 
with nature and labour, but that in so-called 
" capitalist production " capital is not a factor or 
cause of production. A certain sort of "productiv- 
ity " is admitted of capital. " It is first ' productive ' 
because it finds its destination in the production 
of goods ; it is further productive because it is an 
effectual tool in completing the roundabout and 
profitable methods of production once they are 
entered on; finally, it is productive indirectly 
because it makes the adoption of new and profit- 
able methods possible."^ But it is not an "inde- 
pendent factor of production " along with nature 
1 p. 95. 2 p. 92. 3 p. 99, 



POSITIVE THEORY OF CAPITAL. 277 

and labour, but only " the medium through which 
the two original productive powers exert their 
instrumentality. " 

§ 5. It is not easy to deal with the mixed 
thought embodied in these judgments. It is 
true that capital cannot operate as an "indepen- 
dent factor," but neither can nature or labour ; it 
is true that these two latter factors have a claim 
to be deemed " original " in a sense to which capi- 
tal cannot lay claim, but for all that, as soon as 
capital exists and functions as an integral part of 
a more productive method, it is possible and per- 
haps even necessary to treat it as a joint cause, or 
at any rate "condition," of the increased produc- 
tivity. It is of course possible to force language 
so as to insist that capital is only a " tool " by the 
use of which the two original powers, nature and 
labour, attain greater productivity, and to attrib- 
ute the whole of this increased productivity 
either to labour and nature, as Bohm-Bawerk 
appears to do, or to labour alone, as socialism, 
following early English economists, does, or to 
nature alone as did the physiocrats. But nothing 
is gained by drawing such hairbreadth distinc- 
tions between a cause and a condition, a condition 
and a tool. If it is convenient, as it is generally 
admitted to be, to separate capital from labour and 
nature in tracing the organic operations of in- 
dustry, and if, moreover, capital is admitted to be 
necessary to the operation of the more productive 



278 THE ECONOMICS OF BISTBIBUTION, 

methods, no object is served by denying direct pro- 
ductivity to capital ; the question whether it is an 
" independent " factor is entirely beside the point. 

The description of the actual place filled by 
capital, which Bohm-Bawerk gives here and else- 
where, amply justifies and even requires the attri- 
bution of direct productivity to it, and so provides 
a fund for the payment of real interest correspond- 
ing to the fund which the admitted productivity 
of nature and labour furnishes for the payment 
of rent and wages. There is, of course, neither 
"independent productivity" nor an independent 
product, for the organic nature of cooperation of 
the factors renders this impossible. But the ac- 
count of the actual functioning of forms of capital 
given by Bohm-Bawerk does not justify him in 
placing capital on any different footing from 
nature and labour in a theory of distribution. 

§ 6. But while Bohm-Bawerk, as we see, 
admits that capital as an instrument does assist 
to increase objective productivity, he denies that 
such objective productivity is essential to explain 
the payment of interest. The " subjective pro- 
ductivity," the ripening of future into present 
goods by the passage of time, is deemed a sufficient 
source of interest. Thus, time itself is given as a 
sufficient explanation of the origin and payment 
of interest. 

Professor Smart puts this in unmistakable 
terms : " The simplest case of interest is that in 



POSITIVE THEORY OF CAPITAL. 279 

which it appears in the loan for consumption. 
Here we have a real and true exchange of a smaller 
sum of present money or present goods for a 
larger amount of future money or goods. The 
sum returned principal plus interest is the 
market valuation and equivalent of the principal 
lent. The apparent difference in value is simply 
due to our forgetting that XlOO in our hands 
now is not the same thing as XlOO a year hence. 
This agio on present goods is interest. In other 
words, interest is a complementary part of the 
price — a part equivalent of the principal lent. 
Apart altogether from an organised system of 
production this agio would emerge, and has 
emerged, as something claimed by the saving 
from the unthrifty. "^ 

§ 7. This passage summarising the extreme 
claim of Bohm-Bawerk's theory will serve to bring 
home to our minds its deficiencies. My first 
criticism is that a theory which explains interest 
by the rise of subjective valuation taking place 
when future goods become present goods, is inade- 
quate, because it provides no fund for the pay- 
ment of real or objective interest. I have already 
shown that the instance of a loan of consumption 
goods to an unthrifty person shirks the issue, be- 
cause either the payment of interest is impossible 
or it proceeds from the abnormal productivity of 
some other factor : such payment is no more a 
1 Preface to Positive Theory^ p. xi. 



280 THE ECONOMICS OF DISTRIBUTION. 

case of normal interest than the advance obtained 
by a farmer to pay " rent " which his land has not 
justified, is a normal instance of rent. An " agio " 
of the kind Professor Smart describes, a mere rise 
of subjective valuation, cannot of itself explain 
how a quantity of goods with an objective ex- 
change value is paid as interest. A change of 
estimate cannot of itself be capable of yielding an 
increase of objectively measured values. The un- 
dervaluation of a future as compared with a pres- 
ent satisfaction provides in itself no economic 
means of enlarging the objective source of the 
future satisfaction when it comes. The lapse of 
time cannot be held to cause forms of capital to 
breed or grow so as to furnish an increased num- 
ber for future enjoyment. Yet it is evident that 
this objective interest is what we require to ex- 
plain. If I lend goods represented by 100 pieces 
and receive back at the end of the year goods rep- 
resented by 105, no change of subjective valuation 
will account for the existence of the extra 5. 
Neither the lapse of time nor my change of view 
will explain this origin. They must arise from 
some industrial power to which the term "pro- 
ductivity " may be given. Since it is admitted 
that the service of capital as a tool is to lengthen 
the processes of production, and that "every 
lengthening of the process is accompanied by a 
further increase of the technical result," ^ in other 

1 p. 84. 



POSITIVE THEORY OF CAPITAL. 281 

words that "every extension of the productive 
process leads to some surplus result,"^ it is 
surely wise to regard this surplus result as the 
true source of objective interest. We have here 
an objective productivity as a basis of interest. 
If Bohm-Bawerk and Professor Smart had con- 
fined their view to these cases of loans of capital 
for productive purposes, they could at any rate 
have supported the theory of "Undervaluation" of 
Future Goods as the source of "interest" by falling 
back upon an objective product which should fur- 
nish the goods to pay this interest. But the 
hardihood of these instances in which this objec- 
tive productivity is directly and purposely ex- 
cluded invalidates this theory. Referring to 
Professor Smart's statement, I cannot for one 
moment admit that " apart altogether from an 
organised system of production this agio would 
emerge." If there were no organised system of 
production, the subjective undervaluation of future 
goods by a lender would in no wise enable him to 
receive any material representative of this " agio " 
in interest. Bohm-Bawerk's theory of production 
does not require him to dispense with this " sur- 
plus product " of long-period production, and by 
doing so he wrecks his theory. In a word, the 
problem which appears to Bohm-Bawerk an es- 
sentially " subjective " one is also objective. 
Bohm-Bawerk and Professor Smart think that 

1 p. 86. 



282 THE ECONOMICS OF DISTRIBUTION. 

they have only to prove an emergence of subjec- 
tive values, whereas they must prove an emergence 
of objective values, or, other things equal, an 
increase of products. Treatment of the problem 
of loans in terms of money sometimes enables 
them to evade this fact. The simple essential 
setting of the problem of interest is not that of a 
loan of ^100, but the case where A lends B a saw 
and receives back a saw plus a plank. Required 
to explain the existence and payment of the plankr 
§ 8. The truth seems to be that the part played 
by time, and its treatment as a sort of agent of 
production of value, is altogether misconceived by 
Bohm-Bawerk. In his treatment of what he 
terms, in a phrase which itself begs the question, 
"the technical superiority of present goods," 
he asserts, "It is an elementary fact of experi- 
ence that methods of production which take time 
are more productive. That is to say, given the 
same quantity of productive instruments, the 
lengthier the productive method employed, 
the greater the quantity of productivity that can 
be obtained."^ Here he would make it appear 
that the lengthiness of method is the cause of pro- 
ductivity. He affects to have proved this, but he 
has done no such thing. He has only proved that 
time or " lengthiness " is one condition of those 
roundabout processes which are technically more 
productive. 

1 p. 260. 



POSITIVE THEORY OF CAPITAL. 283 

The effort to attribute to lapse of time a causal 
efficiency due really to the nature of the processes 
which require time is most plainly manifested in 
the following instance. " Suppose that, in the 
year 1888, we have command of a definite quan- 
tity of productive instruments, say, thirty days of 
labour, we may assume something like the follow- 
ing. The months of labour, employed in methods 
that give a return immediately, and are, therefore, 
very unrenumerative, will yield only 100 units of 
product, but of course yields them only for the 
year 1889 ; employed in a two years' process it 
yields 280 units for the year 1890, and so on 
in increasing progression ; say 350 units for 1891, 
400 for 1892, 440 for 1893, 470 for 1894, and 500 
for 1895."! 

Here time is made to appear a cause of objective 
productivity. But what are the facts ? It is not 
the duration of the process which gives the in- 
creased yield, but the nature of the processes 
which take a longer time, i.e. the employment of 
concrete forms of capital which are more pro- 
ductive instead of concrete forms which are less 
productive. Bohm-'Bawerk shirks the issue by tak- 
ing for his example " 30 days of labour," a thing 
which is not capital, and which is expressed in 
terms of time. Let him take concrete forms of 
capital and he will have difficulty in evading the 
conclusion that " the technical superiority" consists 

1 p. 261. 



284 THE ECONOMICS OF DISTRIBUTION. 

not in duration, but in the industrial character of 
these forms. ^ 

When Bohm-Bawerk proceeds to claim ^ for dura- 
tion of time increased value as well as increased 
technical productivity, he falls into another error. 
In a contribution to a theory of interest he is 
required to prove that this time process yields 
objective or exchange value. What he actually 
claims for it is an increase of subjective value, or, 
to quote his words, " If it puts more means of sat-^ 
isfaction at our disposal, it must have a greater 
importance for our well being." But this greater 
" satisfaction " is only one factor in the attribution 
of greater exchange or objective value to goods. 

The confusion of thought, which is involved in 
this whole attempt to make time do something 
which it cannot do, is most curiously illustrated 
in the final paragraph in which Bohm-Bawerk sum- 
marises the " positive result " of his argument. 
" The relation between want and provision for 
want in present and future, the undervaluation of 
future pleasures and pains, and the technical ad- 
vantage residing in present goods, have the effect 
that, to the overwhelming majority of men, the sub- 
jective use value of present goods is higher than 
that of similar future goods. From this relation 
of subjective valuation there follows, in the market 

1 The tabular illustration on p. 262 only makes the same 
assumption more elaborate. 

2 p. 263. 



POSITIVE THEORY OF CAPITAL. 285 

generally, a higher objective exchange value and 
market-price for present goods." ^ Passing over 
the assumption contained in the last sentence, that 
objective values are determined by the subjective 
valuation of one of the two parties to an exchange 
(the root fallacy of the Marginal Utility School), I 
wish to call attention to the astonishing " argu- 
ment " of the earlier sentence in which " the 
undervaluation of future pleasures and pain " is 
made a cause of the fact that " the subjective use 
value of present goods is higher than that of 
similar future goods," i.e. undervaluation is the 
cause of undervaluation. 

The involved reasoning which arises in the vain 
effort to impute objective results to purely subjec- 
tive causes almost inevitably lands its author in 
patent absurdities like this. 

By stating the problem of interest as consisting 
in the undervaluation of future goods, time is rep- 
resented as a producer of values by undoing this 
undervaluation. The point of view which the 
familiar process of discount presents lends itself 
not unnaturally to this subjective view of inter- 
est which assigns to time itself a productive 
power. But the attribution of such power to 
time is quite erroneous. The change of subjective 
valuation which conies with time indisputably 
plays a part in determining the price of the use of 
capital, or, in other words, how much of the total 

1 p. 281. 



286 THE ECONOMICS OF DISTRIBUTION. 

increase of objective productivity due to the 
cooperation of capital with the other factors shall 
be paid to the owner of the capital ; but the part it 
plays is entirely different from that assigned to it 
by Bohm-Bawerk. In the pages of the " Posi- 
tive Theory" itself are expressions which might 
have put its author on the right track. " The 
disadvantage connected with the capitalist method 
is its sacrifice of time " ^ surely suggests that 
time is a cost of capitalist production rather than 
a creative force. So, again, we are told that capi- 
talism "demands a sacrifice of time, but it has 
an advantage in the quantity of product," which 
surely suggests the entire truth that this " ad- 
vantage in the quantity of product," affords a 
fund out of which payment of interest is made for 
the " cost " involved in " sacrifice of time." 

§ 9. Not merely are we not justified in regard- 
ing time as capable of the technical productivity 
required to explain real interest, but we cannot 
regard it as creative of a rise of subjective values. 
Because my valuation of a house is XlOO for this 
year, <£95 4s. for next, and because in a year's 
time I shall value at <£100 what I had valued at 
<£95 4s., Bohm-Bawerk insists that by lapse of 
time a piece of goods, value ^95 4s., has added 
5 % to its value. 

We have already noted the fallaciousness at- 
tending the treatment of interest as payment for 
the use of capital as valued in money. Since the 

1 p. 82. 



POSITIVE THEORY OF CAPITAL. 287 

money value of capital is only obtained by capi- 
talising the interest, this process assumes the very 
point at issue, namely, the growth of value. For 
if I receive for the use of forms of wealth, during 
the past year, the sum of <£5, I proceed to do a 
little sum which enables me to say that what I 
lent was worth .£100 at the beginning of the year 
and X105 including the interest at the end. But 
by saying this, I beg the question of a growth of 
value by my method of reaching the XIOO. I 
only know that what I lent has been returned 
with an addition oi -^; I cannot, however, assume 
that the increased quantity of goods returned has 
^ greater value, either subjective or objective, 
than the smaller quantity originally loaned, for 
this is to assume an absolute stability or inherency 
of value in material forms. I am not logically 
entitled to assert that the bargain by which I get 
c£105 goods instead of £100 is a growth of value 
from £100 to £105, for if instead of getting back 
£105 I only get back £102, I should be obliged 
to say that what I lent was not worth £100, but 
a smaller sum of money. In other words, the 
value of the capital is not a prime datum., but is 
calculated from the interest by a method which 
assumes that an increase of value has been brought 
about by the process of lending. This increase of 
value I suggest is due to the greater technical 
productivity which Bohm-Bawerk himself admits 
of capitalism. 



288 THE ECONOMICS OF DISTRIBUTION. 

§ 10. In other words, the "ripening of future 
into present goods " by process of time is really a 
cost theory of interest. The positive and even the 
productive complexion it puts upon the familiar 
phenomenon of discount or undervaluation must 
not deceive us. The statement of undervaluation 
is simply the quantitative statement of the cost of 
abstinence which involves time as a condition of 
its operation. If I value the services of a house 
at ^100 for this year, my preference of present 
to future enjoyment may lead me to value next 
year's services at <£95 4s. But when next year 
actually comes my £95 4s. valuation has risen to 
£100. But to say that I now esteem the current 
year's services at <£5 more than I esteem the pro- 
spective services of next year is only another and 
a less obvious way of saying that I estimate the 
loss or pain of a year's postponement of satisfaction 
at <£5. If I could take out the whole satisfaction 
at once, the man who shall persuade me to post- 
pone it must pay me what the market determines 
to be the price of this effort of abstinence or post- 
ponement. It is evident what time does here, and 
what it does not do. It does not create either 
increased product or increased value, but does 
constitute a condition of the cost which, by affect- 
ing the supply of capital, helps to determine the 
price of the use of that capital, or from the stand- 
point of the capitalist the price of the effort of 
abstinence. I have already shown that this absti- 



POSITIVE THEOBY OF CAPITAL, 289 

nence is not a merely negative force, but one 
which must be ranked as positive and productive, 
at any rate in the sense that it is essential to the 
existence and so to the technical productivity of 
capital. 

Undervaluation, or discounting of future values, 
is simply one way in which the cost of abstinence 
presents itself to the mind of the person who 
saves or lends. It is not a source of interest, it 
affords no explanation of the possibility of objec- 
tive interest, it is simply one determinant of the 
amount or rate of interest. As an economic 
factor in the determination of price it ranks as a 
subjective cost with the subjective cost of labour, 
and as an expense of production must be defrayed 
out of the extra product due to the productive 
cooperation of the capital and labour. 

§ 11. It is to be clearly understood that I do 
not dispute any of the facts of Bohm-Bawerk's 
statement of undervaluation, or that they have a 
true bearing upon the problem of interest. Where 
I join issue with him is that while he admits the 
productive services of forms of capital, he refuses 
to regard these services as the root and indispen- 
sable condition of interest and finds instead a 
purely subjective cause. 

Let me briefly rehearse my objection to his argu- 
ment as to the payment of interest for use of dura- 
ble goods. He says, " If the current year's use of 
a machine is worth 100, and the machine is capable 



290 THE ECONOMICS OF DISTRIBUTION. 

of doing work of equal quality for five years more, 
the machine is not worth 6 x 100, but 100 + 95.23 
+ 90.70 + 82.27 + 78.35 = 532.93."! The capi- 
tal valuation of the machine at the beginning will 
be 532.93 ; but, during the six years it lasts, the 
total use or " consumption " of the machine will 
work out at an aggregate value of 600. The 
difference between the two sums affords a fund 
out of which interest is payable. This fund ap- 
pears to arise from the ripening process of time.^ 
Now I dispute none of the facts in this statement, 
but I assert that they do not furnish the required 
explanation of the economic phenomena which 
actually occur when a loan of durable goods is 
made. As a matter of fact, when a loan of a 
machine or other durable goods is made, the terms 
are such as to secure a permanent life for the 
machine ; interest does not fructify during six 
years, but for a perpetuity. According to Bohm- 
Bawerk's setting, it is possible to obtain the exact 
value of the capital by adding up the value of the 
services of six years ; in actual industry, though 
the capital possesses an exact known value at the 
outset, its value for purposes of loan or invest- 
ment is not calculated by consideration of its gross 
services during the time it lasts, but by capitalisa- 
tion on the basis of the value of the net interest, 
after provision for its continuous existence has 
been made. If A rents to B a house or a machine, 

1 p. 343. 



POSITIVE THEORY OF CAPITAL. 291 

he reckons the capital value of this loan by capi- 
talising the rent or net interest, provision being 
made to repair or replace the house or machine. 
Now, since an indefinite or eternal life is thus se- 
cured to the house or machine, it cannot be pre- 
tended that the capital value can be obtained by 
adding the yearly values, for these would come 
out as infinity. Bohm-Bawerk's explanation of 
interest ignores, in the first place, the actual in- 
dustrial services or " productivity " of the capital 
forms which are used, and whose use or consump- 
tion do actually furnish the goods whose " value " 
is returned as yearly interest to the owner, and 
finds the cause of interest in what is really a con- 
dition of this productivity. In the second place, 
it posits a fixed duration to the functioning of 
form of capital which is discordant with indus- 
trial facts. For the actual phenomenon which 
seeks explanation is the eternity of interest paid 
for the loan of a material form whose existence 
appears to be perishable. I have tendered an 
explanation of this phenomenon by showing that 
the economic existence of a material form of capi- 
tal is not really terminable, but that it exerts a 
productive force which can secure for it a per- 
petuity of existence, and leave a margin of prod- 
uct from which perpetual interest may be paid. 
By ignoring the '' productivity " of the services of 
capital, which he yet generally admits to exist, 
and confining his attention to a merely subjective 



292 THE ECONOMICS OF JDISTBIBUTION. 

phenomenon, — the change in the mind of the 
lender, — Bohn-Bawerk cuts himself off from all 
possibilit}^ of explaining the real problem of a 
perpetuity of net interest. 

He rightly insists that, in order to support this 
theory of interest derived from productivity, it is 
necessary to prove a net surplus product after pro- 
vision against wear and tear of capital, what he 
terms a " net Nutzung." I claim to have shown, 
by illustration from each of the several classes of 
capital forms, that this surplus product or "net 
Nutzung " does exist. 

Thus, and thus alone, is it possible to place capi- 
tal on the same footing with nature and labour. 
In the case of these two factors, a net surplus 
product, after replacement of wear and tear, is 
admitted. The ordinary finance of the business 
world enables us to attribute to capital a direct 
productivity analogous to that of nature and la- 
bour, of such size that, after similar provision for 
replacement has been made, a positive surplus may 
exist for payment of net interest. 

Time is a condition, on the one hand, of the 
effort of abstinence which keeps as productive 
goods a value which would otherwise be consumed 
as consumption goods; and, on the other hand, 
of the productivity of the forms of capital which 
this abstinence supports. The productivity thus 
obtained furnishes a net product which forms a 
material economic fund out of which real interest 



POSITIVE THEORY OF CAPITAL. 293 

may be paid ; the amount of this real interest is 
determined directly by the relation between the 
marginal cost of the abstinence, and the mar- 
ginal utility of the " use of capital," which is the 
effect of that abstinence. 

§ 12. In thus repudiating the explanation of 
Bohm-Bawerk, we do not return to a mere " pro- 
ductivity " theory of interest. Productivity is 
not to be termed the efficient cause, but only the 
essential material condition of interest. Produc- 
tivity of capital is consistent with the non- emer- 
gence of interest. The value and price of use of 
capital emerge, as do all values and prices, from 
the interaction of marginal cost and marginal 
utility of that which is bought and sold. 

The representation of the problem of interest, 
as residing in an exchange of present against 
future goods, does not accord with the facts of 
commercial life, and throwing the whole issue 
upon conditions of subjective valuations, or differ- 
ences in the mental vision of buyers and sellers, it 
furnishes no fund for the payment of objective in- 
terest. What is actually bought and paid for by 
net interest is use of capital, and, in order that 
payment may be made, that use must find expres- 
sion in perpetual productivity. 

I may, in conclusion, sum up my objections 
against Bohm-Bawerk's theory of Interest, in these 
four sentences : — 

1. By denying the necessity of attributing ob- 



294 THE ECONOMICS OF DISTRIBUTION. 

jective productivity to capital, he provides no fund 
for the payment of objective interest. 

2. He furnishes no explanation of the actual 
phenomenon of the eternity of interest. 

3. He misrepresents the transaction as an ex- 
change of present against future goods, making 
the issue one of subjective valuation alone. 

4. The undervaluation of future goods assigned 
as the economic cause of interest is in reality a 
" cost " of the functioning of capital, and furnishes 
one side of the forces which determine the value 
and the price of use of capital. 



CHAPTER X. 

THE THEORY OP SURPLUS VALUE — ITS INFLUENCE 
UPON DISTRIBUTION. 

§ 1. If the analysis of economic bargaining 
given in the preceding chapters is correct, it can- 
not fail to have an important corrective influence 
upon the theory and the practice of Distribution. 

Although the direct treatment of ethical con- 
siderations is still commonly ruled out of economic 
theory, it has always been tacitly assumed by 
laissez-faire economists that the laws regulating 
distribution normally assign to each owner of a 
factor of production that portion of the product 
which is economically necessary to evoke and 
maintain the efficient operation of his factor, and 
nothing more. 

It is claimed that competition, or the free play 
of enlightened self-interest, among the owners of 
capital, organising ability, and labour-power, pre- 
vents the capitalist undertaker or the labourer 
from receiving any more than the minimum so- 
cially necessary under existing circumstances to 
secure the service he is capable of rendering. 
Any interference with the operation of this natural 

295 



296 THE ECONOMICS OF DISTBIBUTIOJST. 

law has been represented as slight and transitory 
— a necessary friction for which special allowance 
is to be made. There are no powerful or enduring 
economic forces which enable the owners of any 
class of land, labour, capital, or business ability to 
secure more than the necessary minimum. The 
freedom of competition among the owners of the 
several factors, if not absolute, is such as to 
provide a process of filtration by which the whole 
advantage of improvements in methods of produc- 
tion of wealth passes into the hands of the con- 
sumer. " It is the consumer who is the residual 
claimant in the results of modern industry." ^ 

Each producer gets his minimum ; the rest goes 
to the consumer, and as all are consumers, the 
operation of the Law of Distribution is even con- 
formable to a general sense of justice or of social 
expediency. Some little hitch rises in the mat- 
ter of economic rent of land; from Adam Smith 
downward the laissez-faire economists felt that the 
power of the landowner to reap where he had not 
sown failed to harmonise with the moral symme- 
try which, in spite of occasional disclaimers, they 
really esteemed as a buttress of economic doctrine. 

But, after all, rent did not affect directly the 
consumer ; it did not enter into price, nor did it 
defraud labourer or capitalist, who got their due 
wage and profit. 

Taxes levied upon the agricultural classes and 

1 Hadley, Economics, p. 318. 



THE THEORY OF SURPLUS VALUE, 297 

more or less upon manufactures and commerce 
tended to settle upon rent, and an extension of 
this policy might enable the community to remedy 
what might seem to be a natural injustice. 

It is curious to note how seldom economists 
since Ricardo have taken the trouble to probe 
the loose and flabby notion which represents the 
consumer as a fourth party in the act of distribu- 
tion, in whose interests the antagonisms of land, 
labour, capital, find an ultimate harmony. Pro- 
fessor Hadley speaks of the consumer as "the 
residual element," seeming to imply that all con- 
sumers must be equally able to hold and to enjoy 
the benefits of improved industry which reach 
them in the shape of lower prices. 

Now if the labourer, in his capacity of con- 
sumer, is able to hold all the advantages of falling 
prices, then his real wages, the only source of the 
money income whicli he spends, are capable of 
rising indefinitely above the necessary minimum. 
The same holds of the interest of the capitalist. 
Again, if classes of labourers and capitalists are 
necessarily able to maintain rates of real wages 
and real interests beyond the minimum, they will 
exert their power as producers, and this rise of 
real wages and interests would prevent prices from 
falling, for it would imply a stability in those 
expenses of production which admittedly enter 
into price. The forces upon which the laissez- 
faire economist relies to prevent capital and 



298 THE ECONOMICS OF DISTRIBUTION. 

labour from taking more than minimum profits 
and wages, will seem to prevent labourer or capi- 
talist from holding the advantage assigned to them 
as consumers. 

The theory of the incidence of taxation suffers 
from this same confusion. It is often urged that 
a tax laid upon some product or some factor of 
production will be shifted on to the consumer 
through a rise of prices. But this, though often 
true, is no ultimate analysis. For it will be ad- 
mitted that consumers can in some cases throw 
back the tax upon some body of producers. The 
only consumers who must be deemed taxable, qua 
consumers, are those in receipt of a guaranteed 
money income ; those whose income is derived 
from and fluctuates with the value of some factor 
of production will be liable to have their income 
affected by a tax which is imposed upon them in 
an enhanced price of commoditiesc It would be 
necessary to investigate the sources of income of 
each consumer closely in order to ascertain how 
far he ultimately bore a tax which raised the price 
of the commodities he consumed. The ability to 
throw back a tax upon producers and the rapidity 
of such rejection are matters for detailed practical 
inquiry. But in a theory of Taxation every part 
of a tax must in its ultimate incidence be traced 
to some class of producers, if we are to understand 
its effect upon the distribution of wealth. 

In a word, for purposes of the theory of Distri- 



THE THEOBY OF SURPLUS VALUE. 299 

bution, the antithesis of producer and consumer is 
a false one. The problem of distribution is that 
of the payment of owners of factors of produc- 
tion, and whatever advantage may actually accrue 
to each or any of the producers, by reason of a fall 
of prices to consumers, must be reckoned as a part 
of the real rent, wages, or interest which they 
receive. 

We are entitled to dismiss altogether the con- 
sideration of the consumer in dealing with the 
theory of distribution, provided that we deal with 
real payments for the use of factors of production. 

§ 2. It is, however, the consideration of the 
composition of a price which brings out the differ- 
ence between our theory and the ordinary theory 
of English text-books. According to the latter, 
the price of a consumption good is entirely resolva- 
ble into a number of expenses of production at the 
several stages of production which represent the 
marginal cost of the labour and capital there em- 
ployed. Now the whole tenor of our analysis has 
gone to show that the price of a commodity is not 
exhausted by the payment of these various mini- 
mum money-costs of production. 

Let me briefly rehearse the method of reasoning 
adopted. 

First, by analysis of the process of determining 
a price of commodities in a market, we recognise 
the existence of an element of price which was 
not explained by competition, which was not nee- 



300 THE ECONOMICS OF DISTRIBUTION. 

essary to induce the final pair of bargainers to 
complete that bargain whose terms set the price 
for the market. In other words, we recognised the 
actual existence of an element of "forced gain," 
something not paid for as a " cost " of production, 
but yet forming an expense. 

Next, resolving the price of a commodity into 
the several prices of uses of factors of production 
which entered into it, we investigated the condi- 
tions of determining the price of the use of land. 
Here we saw that while differential rents of land * 
did not enter into price, the worst land in use for 
most specific purposes yielded a positive rent, that 
this marginal rent being necessary to evoke the 
use of land for this purpose must enter into price, 
and that the price of a consumption good will 
contain various marginal rents of land. 

Investigating in similar fashion the determina- 
tion of the prices for use of capital and labour, 
we found that they did not differ essentially from 
land in yielding marginal rents ; that both capital 
and labour could rightly be divided into practi- 
cally non-competing groups, from which emerged 
a number of marginal class interests and wages, 
which entered into price. 

Under the logical system of laissez-faire eco- 
nomics, there was properly no social problem of 
distribution to be solved, unless it were the ques- 
tion of the advisability of permitting private own- 
ership of land ; the complete harmony of capital 



THE THEORY OF SURPLUS VALUE. 301 

and labour was secured by the competition of 
owners of capital and labour-power, which would 
prevent the existence of any surplus beyond the 
necessary payments to the capital and the labour 
employed under the least favourable circumstances. 
Even allowing that the operation of the law of 
increasing returns would yield to the larger busi- 
nesses a gain over and above this minimum inter- 
est, it would be difficult to regard this differential 
gain as a cause of discord between capital and 
labour, for it would not be possible for the la- 
bourers employed in these more profitable busi- 
nesses to obtain a higher price for the sale of their 
labour-power than those employed in the least 
profitable businesses. So long as it is held that 
only the bare money costs of marginal capital and 
labour enter into price, while rent of land is alto- 
gether excluded, the problem of distribution is of 
a mechanical and business nature which cannot 
rightly engage the feelings or activities of the 
owners of factors of production. 

The analysis offered here entirely changes the 
character of the problem. The prime distinction 
is no longer interest, wages, and rent, but between 
costs of subsistence of various factors of produc- 
tion on the one hand, and a variety of marginal 
and differential "rents" supported by various de- 
grees of economic necessity upon the other. 

It is of the first importance to understand what 
is respectively comprised under these two heads. 



302 THE ECONOMICS OF DI8TBIBUTI0N. 

Distribution is achieved, excepting the cases of 
annuitants, officials with fixed salaries, etc., by a 
series of variable payments for the use of labour- 
power,^ forms of capital, or land. These pay- 
ments are made at each stage in the processes of 
production out of moneys received from the sales 
of goods or services. 

The money paid as the price of retail goods is 
partly used by the shopkeeper to maintain his re- 
duced stock and his premises, etc., partly to pay 
wages, profit, rent for the factors of production 
he employs. The merchant from whom he pur- 
chases goods effects a similar distribution, and so 
does the manufacturer, the farmer, and the other 
responsible managers of the earlier processes of 
production. Thus the circulation of the money 
said to be " spent " is achieved: the money which, 
being " saved," is used by the saver to buy new 
forms of capital, undergoes a similar process of 
distribution. 

Thus the aggregate payment for a supply of 
commodities is resolvable into a number of sepa- 
rate payments for the use of the factors that are 
engaged in the several processes of production. 
Now the central problem of distribution consists 

1 In tliis general setting of tlie Theory of Distribution^ I have 
thought it best to include under wages all kinds of payment 
for industrial work, including earnings of management, and 
much, if not most, of what is commonly included under profit, 
because no different principle is involved in the determination 
of these earnings. 



THE THEORY OF SURPLUS VALUE. 303 



in the varying degrees and conditions of necessity 
attaching to tlie different parts of these payments 
for use of factors of production. 

In restating this problem a simple diagram 
will help to mark the distinctions. AI represents 
the total supply of a factor, either land, labour, 




N MARGINAL RENT io/ 
30/ 



L SUBSISTENCE 



20/ 



or capital, toward a specific market, comprised of 
units AB, BC, CD, etc., with varying degrees of 
value, HI being the marginal or least valuable 
unit of supply. The total payment for the use 
of this factor of production is the figure on the 
base AI. Following our analysis we may repre- 
sent this payment as divisible into the following 
parts : the lowest portion will be a payment of 
subsistence or maintenance, the sum just suliicicnt 



304 THE ECONOMICS OF DISTRIBUTION. 

to secure the economic use of the unit in default 
of any alternative use. This amounts in the 
present case to 20s. per unit of supply. In the 
case of labour we posited a subsistence wage of 
15s. for labour of lowest skill ; in the case of capital 
a minimum interest of 21 %. In the case of land 
a payment infinitesimally small would, in theory, 
be able to secure the use, so that here the line KL 
would fall so as to stand only just above AI. 

In the case set forth in ou.r diagram the worst 
or " marginal " portion of supply gets something 
more than this "rent" of bare subsistence. The 
" rent" it actually receives, the " marginal rent," is 
40«. instead of 20s. It can obtain the additional 
20s. chiefly because one or more of the units of 
supply have an alternative use open to them from 
which they could earn a high differential rent. 
Say that AB has such alternative use open to it. 
In order to secure AB for the supply in question 
it may be necessary to pay it at the rate of 65s., 
because its alternative use would yield 64s. 

This explains the major part of what figures on 
the diagram as marginal rent, but not the whole. 
For if AB only got 65s., HI, the marginal unit of 
supply, would only get a marginal rent of 30s. 
instead of 40s., for we have seen that the actual 
margin is determined (other things equal) by the 
necessary price of that portion of supply with an 
alternative use, which we call the " determinant 
portion of supply." Now if AB could only get 



THE THEORY OF SURPLUS VALUE. 305 

QBs. and HI 30s., the dotted line would represent 
the margin. 

But we have seen that although AB could be in- 
duced to contribute to supply at 65s. ^ he may for all 
that be able to claim 75s., if in the bargaining for 
a price he is the stronger party, and can claim a 
"forced gain." The actual margin of 40s. in our 
diagram supposes that AB is in a position to take 
this forced gain of 10s., being able to secure for 
his services not 65s. but 75s. If he has this 
power, each of the other contributors to supply 
will profit by it, since their payment is deter- 
mined by his. If he can take 75s., the next 
productive unit can get 70s., although he may 
have no alternative use open to him and would 
therefore, if necessary, have been willing to accept 
a far lower price. The determinant portion of 
supply fixes the marginal rent or price. In our 
present case the marginal rent is 40s., of which 
20s. is payment of subsistence, 10s. dependent 
upon an alternative use of some portion of supply, 
and 10s. a "forced gain." In addition to the 40s. 
at the margin, superior units of supply can take 
differential rents marking the degrees of their 
superiority. 

Now we have seen that all these payments are 
" necessary " in the sense that they issue naturally 
from processes of competition and bargain in 
which each competitor and bargainer seeks to 
get the maximum gain for himself. 



306 THE ECONOMICS OF DISTRIBUTION. 

But they are not equally necessary in the sense 
that they are payments essential as economic 
motives to the application of the productive force 
for which they are paid, and cannot be refused or 
diverted without interference with the present 
course of industry. 

The issue is fraught both with theoretical and 
practical importance. It can be best approached 
from the standpoint of taxation. Power to resist 
taxation is the most efficacious test of economic 
necessity. Let us therefore inquire what is the 
relative ability of subsistence payment, marginal 
rents (comprising forced gain and a differential 
rent), and differential rents to resist direct and 
indirect taxation. 

The taxability of subsistence payments need not 
detain us long. True wages of subsistence for 
labour or for capital cannot be taxed : non-taxi- 
bility is in reality implied in the very nature of 
a subsistence payment. It may, however, be 
briefly illustrated thus. Let us suppose that the 
marginal wage of unskilled labour in a town 
stands at a 15s. subsistence wage, and that an 
attempt is made under an old-age pension scheme 
to stop Is. per week out of wages as a tax con- 
tributory to a pension. What happens? There 
exist ex hypothesi unskilled labourers who, if the 
real wages represented by 15s. are reduced, will 
refuse to contribute to the supply of labour. 
These " determinant owners of supply " would go 



THE THEORY OF SURPLUS VALUE. 307 

on tramp, cadge, beg, or steal, if 15s. is not 
guaranteed to them. If employers, therefore, 
were empowered to stop Is. out of the 15s. 
wages, the refusal of these men to work would 
reduce the supply of labour, and, since the effec- 
tive demand must be presumed to be constant, the 
price or wages will rise and the Is. per week will 
be stopped out of 16s. instead of out of 15s., this 
rise of money wage preventing the withdrawal of 
labour from assuming any considerable propor- 
tions. At this stage it appears as if the employer 
must pay an extra shilling, representing the tax, 
out of his own pocket. If his business is earning 
for him a higher rate of profit than is economically 
necessary to support the capital and skill engaged 
in it, the tax will probably be defrayed, in large 
part at any rate, out of these surplus profits, as it 
will probably not pay him to raise prices which 
are not fixed by conditions of close competition. 
If, however, the employer's profits are already cut 
down to a " subsistence " rate, the tax cannot be 
defrayed by him. If the trade is one into which 
scarcity rents of land enter as an expense of pro- 
duction, a portion, at any rate, of the tax may at 
this stage be shifted on to the landowner through 
a pressure by tenants operating through reduction 
in demand for land-use. But it is safer to assume 
that an increased wage-bill, shared by all the 
employers in a trade, will oblige them to raise the 
prices of the goods they sell, and pass the tax on 



308 THE ECONOMICS OF DISTBIBUTION. 



to the consumer through enhanced prices. But 
we haye already seen that the consumer is a purely 
fictitious halting-place in the theory of Distribu- 
tion. Making the consumer pay is no final polic5^ 
Our 16s. low-skilled labourer is a consumer. It 
appears therefore, that though he has thrown off 
the tax imposed upon him as producer, he must 
take up his share as consumer, by paying higher 
prices for the goods he buys. But this is not the 
case. He must have guaranteed to him as a con- 
dition of contributing to the labour-market such 
weekly sum of commodities as 16s. would have 
bought for him. If owing to the rise of prices a 
net wage of 16s. will no longer buy these com- 
modities, his money wage must undergo a further 
increase by virtue of the same economic prices 
which raised his normal wage from 15s. to 16s. 
to meet the stoppage of Is. from his wages. This 
rise of wage is in effect another tax, which will 
pass on a similar journey to the first, seeking some 
" surplus " or unnecessary element of income upon 
which to lie. What holds of the subsistence 
wage of unskilled labour can equally be shown to 
hold of all other subsistence payments. If it were 
necessary to evoke the savings of the " determi- 
nant saver " by paying 2^% interest, it will not be 
possible to tax this element of income in the form 
of an income tax or indirectly through the prices 
of commodities. 

This argument assumes, of course, that subsist- 



THE THEORY OF SUBPLUS VALUE. 309 



ence wages are based upon natural necessities 
and not on conventional necessities. The latter, 
though possessing a strong power of resisting 
taxation when firmly embedded in a customary 
standard of life, may be defeated and rendered 
taxable by a steady prolonged attack. Moreover, 
though true subsistence payments are not really 
amenable to taxation, attempts to tax them, 
especially when levelled at skilled labour whose 
true subsistence is more expensive, may be fraught 
with grave injury by degrading the standard alike 
of working efBciency and life of a class of work- 
ers. Taxation has been commonly directed so as 
to prevent a rise of efficiency in work and life of 
the working classes in a country. None the less 
it is true that true subsistence wages, i.e. such 
wages as a really enlightened employer will find 
it profitable to pay, resist taxation. 

§ 3. Turning next to marginal and differential 
rents, it is convenient first to deal with the ele- 
ment in marginal rents called "forced gain." 
These forced gains issue, as our analysis dis- 
closes, in the determination of a price where one 
of the final pair is able to force the price up, 
beyond what he would be willing to take, to 
the utmost that his opponent is willing to give. 
When markets are small and competition very 
slight and ineffective, we saw that these forced 
gains made a large element in prices. Their dis- 
tinctive character is that they are not earned by 



310 THE ECONOMICS OF DISTRIBUTION. 

any effort of production, but constitute a gratu- 
itous surplus which is obtained by the stronger 
bargainer. Forming no economic motive to any 
bargains, they cannot, in theory at any rate, resist 
taxation. A tax imposed upon them as an ele- 
ment of income could not be transferred to any 
other element of income. 

But these " forced gains," forming, as we have 
seen, a part of "marginal rents," enter into the 
prices of commodities as portions of the marginal 
expenses of production. It is therefore impor- 
tant to consider whether a tax levied upon the 
price of commodities with which they enter will 
fall upon them. 

The commonly accepted theory that taxes upon 
commodities generally fall upon the consumer is 
based upon the supposition that their prices only 
measure the necessary money-costs of producing 
the portion of supply produced under the least 
favourable circumstances. Tax^s upon commodi- 
ties, in conformity with this supposition, must nor- 
mally fall upon the consumer who pays the, tax 
in enhanced prices. Are these " forced gains " 
necessary money-costs in this sense? 

Mill, in his formulation of the principle that 
a tax upon commodities falls upon the consumer, 
admits an exception in cases where "the article is a 
strict monopoly and at a scarcity price." ^ 

" The price in this case being only limited by 
1 Principles^ p. 615. 



THE THEORY OF SURPLUS VALUE. 311 

the desires of the buyer ; the sum obtained for 
the restricted supply being the utmost which the 
buyers would consent to give rather than go 
without it ; if the treasury intercepts a part of 
this, the price cannot be further raised to compen- 
sate for the tax, and it must be paid from the 
monopoly profits." Now it will be evident, if our 
analysis of price is correct, that every commodity 
will be sold at a price, which, however subject to 
the keenest competition in its final retail market, 
will contain monopoly elements derived from 
the scarcity of one or other of the requisites of 
production at different stages. Now a tax im- 
posed upon commodities will not be represented 
by a rise of prices until fhese forced gains have 
been absorbed. We must admit that the prices 
of these commodities, however keen the competi- 
tion of retailers in the final stage, are scarcity 
prices, and are therefore squeezable by taxation to 
the extent of the forced element they embody. 
Mill admits "that a tax on rare and high-priced 
wines will fall wholly on the owners of the vine- 
yards." Why? Not, because the owners of some 
vineyards can extort 'a high rent for differential 
advantages over the other vineyards contributing 
to the same market. If the worst vineyards con- 
tributing to this supply paid no rent, the tax 
would not lie upon the owners of better vineyards, 
for the first effect of the tax in making unprofit- 
able the production of wine upon the worst vine- 



312 THE ECONOMICS OF DISTRIBUTION, 

yards, and so raising the margin of cultivation 
and lowering differential rents, will be checked 
and counteracted by the rise of price which would 
follow such a reduction of supply. This counter- 
acting rise of price would prevent the worst vine- 
yards from passing out of cultivation: differential 
rents would remain as before, enhanced prices 
would be paid by consumers, if we accept for the 
nonce the conventional view of the consumer as 
a possible ultimate object of taxation. So far as 
this enhanced price reduced demand for the wine, 
it might operate upon supply and raise somewhat 
the margin of cultivation, but even then the tax 
would only partially — not wholly — fall upon the 
owners of the vineyards. What Mill is really 
looking to is the case of vineyards producing a 
rare wine under conditions in which the worst 
lands yield a high rent. Here a tax upon the 
price of the wine must fall wholly upon the " forced 
gain " or scarcity rent until that is exhausted. For 
if the scarcity rent amounted to <£2 an acre, no 
tax upon wine which did not eat up the £2 for 
the produce of an acre would make either the 
land or the capital and labour employed no longer 
profitable : so long as the labour and capital 
received subsistence wages and interest and any- 
thing was left for rent above the rent which could 
be got from converting the " determinant " vine- 
land into other uses, the supply would not be 
reduced. If the supply remained as before, and 



THE THEORY OF SURPLUS VALUE. 313 

the demand be assumed to stand unchanged, the 
price of the wine could not rise. 

We have, therefore, in this case a crucial test of 
the allegation that a tax upon commodities will 
settle upon a rent of land which is represented by 
a monopoly price. 

If, therefore, similar rents emerge from the em- 
ployment of certain species of capital and labour 
entering into prices like the monopoly rents of 
land, these two will be amenable to taxation. 
Take once more the case of beer : if public-house 
property and breweries yield to their owners a rate 
of real interest (not interest on watered capital) 
higher than is necessary to remunerate the neces- 
sary amount of capital employed in these pro- 
cesses, the price of beer must be so high as to pay 
this monopoly element of interest, as well as to 
pay the specific rent of lands employed in grow- 
ing hops and barley. A tax upon beer would 
then fall upon the interest of brewing and public- 
house property, as well as upon monopoly rents of 
hop-lands. 

Although the special conditions of the produc- 
tion and distribution of beer give peculiar force 
and emphasis to the application of this principle, 
the difference between beer and other commodities 
is only a matter of degree, so far as the presence 
of the forced or scarcity element in price is con- 
cerned. If w^e took the price of bread or boots or 
any ordinary commodity and traced it back to its 



314 THE ECONOMICS OF DISTRIBUTION. 

constituent parts through the various processes 
from the raw materials, we should find the differ- 
ent market-prices containing some element, how- 
ever small, of the same superiority of bargaining 
power which we have styled "forced gain." If 
this theor}^ of Determination of Market-prices is 
correct, there must in every commodity price be a 
certain portion which, representing monopoly or 
scarcity, is thus amenable to taxation. It would 
therefore not be true that " every tax on a com- 
modity tends to raise its price," save in so far as 
such tax exceeded the aggregate of "forced gains" 
which entered into the price. That a tax on the 
rent of land or upon house-rents containing a large 
element of land-rent cannot be shifted, but must 
be borne by the landowner, is a generally received 
doctrine of economists. It is also frequently ad- 
mitted that a tax on wages, so far as it relates to 
the higher grades of mental or educated labour, 
which enjoy some monopoly of opportunities, 
must be borne by these classes and cannot be 
shifted on to other members of the community. ^ 
If the same admission is not made regarding 
interest of monopolies in capital, it is only because 
these are regarded either as abnormal things or 
as the products of fortuitous and passing circum- 
stances. There is, however, ample evidence to 
show that economists are quite aware that certain 
kinds of taxes upon articles sold at scarcity or 
1 Mill, Bk. V, Ch. Ill, par. 4. 



THE THEORY OF SURPLUS VALUE. 316 

monopoly prices will settle upon and be borne by 
the owners of these monopolies. If, then, we can 
discover similar elements of unnecessary gain in- 
herent in all prices, we shall recognise a large 
surplus which is represented in prices and which 
forms a fund upon which taxation must naturally 
settle. 

§ 4. The conclusion suggested by this kind of 
reasoning is that a tax imposed upon any class of 
commodities will percolate through the various 
channels of production, will be rejected from all 
necessary or subsistence payments of capital and 
labour, and will, either directly or through the 
agency of consumers, settle upon " forced gains " 
or unearned income. 

This conclusion may appear at first sight to be 
opposed to certain well-grounded judgments con- 
cerning the taxation of monopolies. It is a cor- 
rect and generally admitted fact that a tax upon 
the price of monopolised commodities may have 
the effect of raising their price, and it appears as 
if the monopolist, in this way, could exercise a 
power to resist completely the taxation of his 
rents of monopoly. A closer investigation of the 
matter will, however, show that everything de- 
pends upon the kind of tax which is imposed. 

A monopolist fixes his price so as to obtain for 
himself the largest net revenue from sales. He 
may sell a smaller quantity at a higher price, or a 
larger quantity at a lower price. The price at 



316 THE ECONOMICS OF BISTBIBUTION, 

which it will be most profitable for him to sell 
will, in default of any tax or other external inter- 
ference, depend upon the elasticity of demand on 
the one hand, and the elasticity of supply upon 
the other. 

It can easily be shown that the effect of a fixed 
tax upon monopolised commodities may be the 
sale of a smaller quantity at a higher price. The 
simplest test is that of a monopoly which in its 
expenses of production conforms to the Law of 
Constant Returns, each new increment of product 
being produced at the same expense as each past 
increment. 

Take the case of a coal monopoly, where the 
mines are so rich that a virtually unlimited amount 
of coal can be produced at a selling price of 12 
shillings per ton, which will include under ex- 
penses of production ordinary interest upon capi- 
tal and earnings of management. 

The line XY represents possible supply, divided 
into increments of 1 million tons. While the cost 
per ton is constant with every increase of supply, 
the selling price falls. The perpendicular AB 
represents the selling price of 20 shillings per ton 
where 1 million tons are . sold. If 2 millions are 
sold, the price is 19 shillings ; if 3 millions, 18 
shillings. So the selling price falls 1 shilling on 
each increment of 1 million tons, until we reach 9 
million tons, which can only be sold at 12 shillings, 
or just enough to defray expenses of production. 



THE THEORY OF SUBPLUS VALUE. 317 

Now, in order to ascertain what quantity of 
production and sales will yield the largest net 
revenue of monopoly rents, let us compare the 
different quantities of supply. 

If 1 million tons were sold, the receipts would 
be 20 million shillings ; deduct expenses of pro- 
duction, 12 million shillings, at 12 shillings per 




K- 



r" ^ 



5'* 



ton, and the monopoly revenue stands at 8 million 
shillings. If 2 millions were sold, receipts would 
be 38 million shillings (19 x 2) and expenses 21 
millions, yielding a monopoly revenue of 11 mill- 
ion shillings. By similar calculation the net 
revenue of 3 millions is found to amount to 18 
million shillings, of 4 millions to be 20 million 
shillings ; 5 millions yields the same net revenue 
as 4 millions. After 5 millions a decline of net 



318 THE ECONOMICS OF DISTRIBUTION. 

revenue appears; 6 million tons only yielding 
18 million shillings and 7 million tons only 14 
million shillings. 

It is evident that a monopolist unhampered by 
taxation will produce 4 or 5 million tons, selling 
them at a price of 17 shillings or 16 shillings per 
ton, and taking on each ton a monopoly rent of 
4 or 5 shillings. 

Now what would be the effect of imposing a 
fixed tax upon a ton of coal, with the view of 
forcing rents of monopoly ? Let us suppose a tax 
of 6 shillings per ton to be imposed. The effects 
are obvious. In the first place, since from the 
standpoint of the producer, expenses of produc- 
tion are now raised from 12 shillings per ton to 
18 shillings, no sale is possible at a less price than 
18 shillings. Instead of selling 4 or 5 million 
tons at 16 shillings or 17 shillings per ton, he is 
economically forced to raise his price to 18 shil- 
lings and sell 3 millions at that price. But at 
18 shillings, though he pays the enlarged expenses 
of production, he earns no monopoly revenue. 
Has the tax then succeeded in taking the monop- 
oly rents ? No. Just as it was not to his interest 
at the lower level of expenses, 12 shillings, to sell 
8 million tons at that figure, so at the artificially 
heightened level of expenses, 18 shillings, it is not 
his interest to sell 3 million tons at that price. 
It is his interest to sell some smaller quantity at 
a higher price so as to earn monopoly rents. In 



THE THEORY OF SURPLUS VALUE, 319 

the case we have taken, the new net maximum 
revenue of monopoly will be obtained by selling 
2 million tons at 19 shillings per ton. 

A fixed tax upon monopolised commodities will 
not succeed then in taking the whole of the mo- 
nopoly revenue, and will succeed in restricting 
production so as to force consumers to pay a 
higher price, which shall remain a monopoly price, 
for their commodities.^ 

If, instead of a production conforming to the 
Law of Constant Returns, the production were 
subject to the law either of diminishing or in- 
creasing returns, the calculation would be far more 
intricate, but the same general law would hold. 
Unless the curve of expenses happened to vary 
directly in exact proportion and for an indefinite 
extent with the curve of demand, so that the 
monopoly element in price per ton did not fall 
with the fall of selling price, a fixed tax on mo- 
nopolies must have the effect assigned to it in the 
instance above taken. 

If we were able to take into accurate account 
the eccentricities of both demand and suj)ply 
curves in any actual trade, we should perceive, as 
Professor Marshall has shown, that there may be 
a number of equilibria between supply and de- 
mand, the prices at which yield an equal net 

1 See Professor Edgeworth's note in the Economic Journal, 
June, 1898 (pp. 235-6), for the mathematical proof of the 
effect of a specific tax on monopolised articles. 

/ 



320 THE ECONOMICS OF BISTBIBUTION. 

revenue to the seller. In such case a fixed tax 
upon commodities would in many cases be evaded 
in large measure by a monopolist choosing the 
equilibrium where the most restricted supply was 
sold at the highest price. The tendency of such 
a tax must always be to produce a restriction of 
supply and a rise of prices. Professor Marshall 
sums up the matter with admirable lucidity : " A 
tax proportional to the amount produced causes 
a greater total loss of monopoly revenue when 
the amount produced is large than when it is 
small, and we shall find it causes the sales which 
afford the maximum revenue to be somewhat 
smaller than before, and offers an inducement 
to the monopolist to raise his prices and con- 
tract his sales." ^ A fixed tax upon commodities 
is a "tax proportional to the amount produced." 

But it must be borne in mind that the partial 
ability of a monopolist to resist such a tax, and 
the injury such tax inflicts upon consumers by 
restricting supply and enhancing prices, by no 
means justifies a general condemnation of a tax 
upon monopolised commodities, but only of the 
fixed tax. 

The failure of a fixed tax upon each unit of sup- 
ply is due to the fact that while the value of the 
tax is fixed, the value of the commodity on which 
it falls is variable. 

A tax upon monopolised commodities so regu- 
1 Principles^ 2d ed. p. 517. 



THE THEORY OF SURPLUS VALUE. 321 

lated as to take the same proportion, or even the 
wliole, of the monopoly rent at each price, would 
not be open to valid criticism on grounds of theory. 
But the application of such a tax would imply the 
possibility of an accurate assessment of the rela- 
tions between monopoly rents, expenses of pro- 
duction, and selling prices. An ad valorem tax 
upon the selling price of commodities would be 
open to the same objection, though in a less de- 
gree, as that which applies to a fixed tax upon 
each unit of supply. Since we could not pre- 
sume the monopoly rent to vary directly and pro- 
portionately with the selling price, an ad valorem 
tax upon selling prices might make it more profit- 
able for a monopolist to restrict production and 
raise prices. 

The scientific basis of taxation of monopolies is 
an ad valorem tax upon the monopoly element in 
prices. Theoretically, this might be levied upon 
each unit of commodity ; practically, it can only be 
safely and conveniently levied upon net revenues 
of monopoly as represented in annual incomes. 

We saw how a tax placed upon subsistence 
wages of labour was shifted directly and indirectly 
upon those elements of income which, not being 
payments necessary to evoke the use of the factor 
of production for which they were paid, had no 
power to resist the tax. What is true with regard 
to subsistence wages of labour, is equally true of 
any other element in expenses of production. 



322 THE ECONOMICS OF DISTBIBUTION. 

Subsistence payments cannot be taxed ; forced 
gains, of which the monopoly element in price of 
commodities is one plain instance, cannot resist 
taxation properly directed against it, whether the 
taxation be of net revenue, or an ad valorem tax 
levied upon the monopoly gains in each act of 
sale. 

§ 5. But forced gains or scarcity rents only 
form one part of " marginal rents " ; it remains to 
consider the taxability of the other part of mar- 
ginal rents, and of the individual differential rents. 

A reference to the diagram on p. 303 will make 
it clear that when we remove from a marginal 
rent any element of " forced gain " that may in- 
here in it, the rest of that marginal rent is im- 
posed by the determinant owner of supply, and 
measures the pecuniary inducement which causes 
him to abandon a differential rent he might have 
earned in some other supply. For example, if the 
marginal rent of 20s. for wheat land is determined 
by the fact that some of this wheat land above the 
margin, drawing (say) 25s., as wheat land, has 
an alternative use for pasture land which would 
afford a rent of 24s. GtZ., it is evident that the 
marginal rent of wheat land depends upon a dif- 
ferential rent of pasture land, and that any cause 
which raised differential pasture rents would dis- 
turb this margin of wheat land. Under such 
circumstances we have a clear answer to the ques- 
tion. Can marginal rent (apart from the forced 



THE THEORY OF SURPLUS VALUE. 323 

gain it contains) be taxed ? A tax levied on mar- 
ginal rent will fall also upon the units of supply 
earning differential rents. If the marginal rent 
of wheat land, 20s., is taxed Is. per acre, the 
determinant portion of supply, land earning previ- 
ously a rent of 25s., is now reduced to 24s. This 
land, ex hypothesis possesses an alternative use for 
which it can earn 24s. 6cZ. ; it will therefore cease 
to contribute to the supply of wheat land, and 
convert itself into pasture at 24s. Gc?., thus re- 
ducing the total supply of wheat land, and raising 
the margin to a nominal rent of 21s. by the action 
of some other portion of supply which now be- 
comes the determinant. An attempt thus to tax 
the marginal rent for some specific supply, will 
have the necessary effect of driving some portion 
of supply into an alternative use, and, by reducing 
the specific supply, will enable the whole of the 
contributors to that supply to evade the tax. 

What holds of specific margins of land, holds 
similarly of specific margins of capital and labour. 
A tax upon "• marginal rents " can .only lie on con- 
dition that the alternative employment is similarly 
taxed. A tax upon the rent of marginal wheat 
land cannot be resisted if a similar tax falls upon 
pasture rents and rents for other uses of land. 

The fact that the marginal rent for one specific 
use of land depends upon the rents for other uses, 
proves that the markets for land-uses, though 
conveniently separated for certain purposes, are 



324 THE ECONOMICS OF BISTBIBUTION, 

organically related at certain points, forming a 
single supply of land. 

So far then, as taxability is concerned, the mar- 
ginal rent (forced gains excepted) may. be treated 
as differential rents, and the real issue relates to 
the taxability of these differential rents. 

§ 6. It is generally agreed by economists that 
differential rents of land cannot resist taxation. 
A tax of 10s. or 19s. in the pound upon all rent 
of land could not be transferred by the landowner 
to his tenant in rise of rent or to any other person 
with whom he has dealings. 

How far is this economic precept applicable to 
capital and labour ? In so far as our gradation 
of investments is valid, an ad valorem tax upon 
differential and marginal interests could not be 
resisted, for these are not necessary motives to the 
application of capital in the directions to which it 
is actually applied. Looking to the real and not 
the money forms of capital, we must place it upon 
precisely the same footing with land as regards 
taxability. Of land it has been said that differ- 
ential rents cannot resist taxation, if the tax be 
levied upon all rents for all uses of land. For so 
long as any rent remains, no land will be with- 
drawn from supply. The whole, however, of 
these differential rents of land could not advan- 
tageously be taken, because some minimum dif- 
ferential rent is necessary to induce the landowner 
to put his land to its best economic use. It is 



THE THEORY OF SURPLUS VALUE. 325 

necessary to preserve some inducement sufficient 
to persuade the owner of good vine-land to apply 
his land to this purpose rather than to wheat grow- 
ing or some other less productive use. 

Similarly with differential and marginal rents 
of capital. If an attack was made upon a specific 
kind of capital drawing high marginal and differ- 
ential rents, by imposing a tax either upon the 
estimated forced element of price or upon the 
net surplus revenue, this tax might be evaded, 
supposing that some of this capital could be di- 
verted without much waste to an alternative use 
nearly as profitable where it would not be taxed. 
If the capital engaged in brewing earned a rate of 
profit 5% higher than any of the owners could 
get in alternative investments open to them, 
almost the whole of that surplus rent could be 
taken by taxation. But if some portion of that 
capital were capable of being transferred with in- 
considerable loss to another use almost as profit- 
able, a special tax on brewing profits would not lie. 

In a progressive condition of industry this tax- 
ability would not generally depend upon the 
adaptability of existing forms of capital to some 
other use, but upon the alternative employment 
open to the new savings which might be engaged 
in increasing the real capital of the brewing trade. 

In capital, as in land, differential rents can only 
be safely taken by taxation, applied, not specifi- 
cally, but generally. A general tax imposed upon 



826 THE ECONOMICS OF DISTRIBUTION. 

all interest above subsistence rate will lie without 
disturbance of industry, provided it is imposed in 
accordance with the principle evolved in our in- 
vestigation of taxation of monopoly prices. The 
whole of differential rents of capital could not, 
however, be taken by taxation. If the special 
profits of a particular brewery were derived from 
a closer monopoly of "tied houses," this extra gain 
could doubtless be taxed; such gain, however, 
would not properly be a differential rent but 
rather a " forced gain " or " scarcity rent " made 
in a restricted market by means of monopoly 
prices for beer. If the brewery was really com- 
peting in a market with other breweries, its higher 
profit, or differential rent (if not disguised earn- 
ings of superior management), would be derived 
from economics of large-scale production with the 
use of the best plant and labour. An attempt to 
take by taxation the whole of this advantage would 
diminish the incentive of capitalists to make the 
most productive use of their capital. In a word, 
the superior differential productivity of capital, 
though not of necessity rightly attributed to skill 
of management (which is but one factor in produc- 
tivity), is conditioned by such skill ; unless the 
capital has some element of differential interest 
secured to it, there is danger it may not be fully 
utilised. This consideration involves no general 
denial of the taxability of differential interest of 
capital, but merely enforces the retention of what- 



THE THEORY OF SURPLUS VALUE. 327 

ever minimum inducement in the shape of higher 
interest (or profit) may be found necessary to pro- 
mote the most economical use of capital. 

A tax rightly adjusted so as to take even 99% 
of the net revenue derived from such differential 
rents could not be resisted, and would have no 
effect in disturbing the application of existing 
capital, or the saving for the establishment of new 
capital. Differential rents are no necessary eco- 
nomic motive to saving ; they do not enter into 
the market-price of saving, which is measured 
from the cost or the utility of the marginal saver, 
who is willing to-day to save for some 2^%. 

§ 7. Now let us turn to wages of labour. Mar- 
ginal class wages, so far as they do not consist 
of " forced gains " or " scarcity rents " artificially 
maintained, depend upon the option which some 
labourers possess to take a differential rent in 
some other trade. The transferability of some 
part of a given labour-market from one emj)loy- 
ment to another, is positively easier and freer than 
in the case of land and existing forms of capital, 
so that the question easily appears to resolve itself 
into that of a general power to tax differential 
wages over the whole field of labour ; in other 
words, an income tax on wages above subsistence 
margin. 

So far as a differential wage is really a wage of 
superior skill or productivity, and not a scarcity 
wage maintained by some artificial ordering of 



328 THJE ECONOMICS OF DISTRIBUTION. 

the market, it appears to stand on a different foot- 
ing from other differential rents with regard to 
the power to resist taxation. 

It is even commonly supposed that such a tax 
would be defeated by a refusal of labourers to 
apply their full productive power unless the full 
rent of individual productivity were secured to 
them. But closer scrutiny indicates that no such 
general judgment can be pronounced. At first 
sight, it doubtless seems as if a man, who gives out 
twice as much productive power in a day's work as 
another, must have twice as much secured to him 
in real wages, and that he can keep these wages 
against all attempts to tax them. But is this nec- 
essarily true ? Suppose A, B, C are three work- 
ers in a trade, and A produces a product 30, B 20, 
and C 15 ; if a tax amounting to the value of 2 
were placed on B's wage, and one of 6 on A's 
wage, would they necessarily withhold part of 
their labour-power? To argue that they necessa- 
rily would withhold, is to make productivity the 
sole determinant of value and price, and to ignore 
effort. The subjective basis of endurance enters 
in as a chief determinant of supply, and requires 
that certain units of labour-power, even in the 
same market, shall be remunerated at a higher rate 
than others. This does not contravene the princi- 
ple of an equal price for an equal quantity in a mar- 
ket. What is really bought in the labour-market, 
is not the objective units of labour-power for which 



THE THEOBY OF SURPLUS VALUE. 329 

the wage is nominally paid, — the piece work or 
the hour, — but the subjective or vital effort which 
underlies it. The subjective effort of the deter- 
minant owner of labour-power in a given supply 
really determines, from the supply side, the price 
per unit of the whole supply, the supply price 
being the result of his bargaining with the repre- 
sentative of marginal utility on the demand side. 

In the case taken above, the subjective effort of 
C may be the determinant on the supply side, and 
his bargaining with the marginal buyer may have 
fixed a price per unit of labour. If, now, B can 
produce one-third more units of labour in a day, 
and A twice as many, with the same amount of 
subjective effort as C gave out in producing 15, 
they take a differential rent of 5 and 15 respec- 
tively. But it by no means follows that they 
could resist a tax which reduced this rent by 2 and 
6 ; for 5 and 15 are not necessarily the sums they 
insist upon receiving as conditions of giving out 
the same subjective effort as C gave out. Some- 
thing more than C receives they must receive, or 
they will reduce their objective productivity to 
the level of C, but the " how much " is a problem 
separately determinable in each case. 

In some kinds of work it might be the case that 
a man will consent to give out his superior energy 
or skill for a wage which is not proportionately 
higher than the wage of the marginal worker in 
his trade. In other cases, the greater intensity or 



330 THE ECONOMICS OF DISTRIBUTION. 

skill can only be evoked by a fully proportionate 
increase of wage. No general principle could 
therefore be applied in taxation of differential 
wages. The taxability would vary, not only with 
the varying character and conditions of the work, 
but even with the individual nature of the worker, 
and with the character of the wants he used the 
later increments of his income to satisfy. In many 
kinds of work the utmost intensity of exertion can 
only be evoked by a rate of payment even higher 
than what is paid for an equal product achieved 
by slower and less intense exertion, — a fact recog- 
nised in various schemes of task or piece wages, as 
also in special rates for overtime. In other kinds 
of work less disagreeable or exhausting, a capable 
worker might consent to express his capability, 
even if he could not reap the full advantage of his 
superiority over the least effective labourer by a 
correspondingly higher wage. 

We must always keep clearly in mind the real 
nature of these "rents of ability." It is only 
when we take the individual man or a portion of 
his labour-time for our standard of measurement, 
that the rate of remuneration seems differential. 
If we regard the worker as a seller of productive 
efficiency, the one who sells more than another of 
his commodity, or who sells a better quality, natu- 
rally gets a correspondingly larger amount of pay. 
If, however, we retain the idea of differential rents 
of labour, we must admit that they are not amen- 



THE THEORY OF SURPLUS VALUE. 331 

able to taxation in the same way and to the same 
degree as differential rents of land. 

§ 8. The difference which manifests itself in the 
taxability of differential rents of labour on the one 
hand, and of land and capital on the other, is not 
difficult to understand. 

Differential rents, beyond a bare minimum, are 
not economic inducements to owners of land and 
capital to apply these factors of production ; for 
"existing forms of land and capital a minimum rent 
and profit suffices to retain their economic service, 
and though new capital is only brought into exist- 
ence by a certain subsistence rate of interest, no 
higher rate for any special purpose is an economic 
motive of saving. 

But labourers will withhold part of their pro- 
ductive power unless some differential wage of 
ability is secured for them. Inanimate nature has 
no ability to withhold its continuous output of 
productive powers ; the owner of a more fertile 
field, who withheld its use because its differential 
rent was taxed, would be cutting his own throat, 
unless the tax swallowed the entire economic rent. 
The value of such supply is determined on the sup- 
ply side by natural scarcity. Where the supply 
depends upon voluntary effort, as in the supply of 
labour-power, the option to withhold enables the 
owner to make conditions which shall secure for 
him a differential rent, some indeterminate propor- 
tion of which must be even secure against taxation. 



332 THE ECONOMICS OF DISTRIBUTION'. 

§ 9. Our analysis of the taxability of the vari- 
ous payments made out of money spent on com- 
modities, resolves these payments into necessary 
expenses of production, subsistence payments for 
use of labour and capital, which cannot be taxed, 
and marginal and differential rents which are in 
various degrees and to various extents amenable 
to taxation. Forced gains or scarcity rents to- 
gether with differential rents of land and capital 
have no power to resist direct taxation imposed 
upon them as elements in income. Forced or 
scarcity rents of labour, together with certain por- 
tions of differential rents of labour, are also in 
theory directly taxable. 

The general tendency of this analysis is to 
justify the economic superiority of taxation upon 
incomes or net revenues over taxation imposed 
upon special classes of commodities or upon special 
classes of rents or profits. 

A general income tax, graduated upon the sup- 
position that the proportion of unearned and there- 
fore economically taxable income varies directly 
with the absolute size of incomes, on the one 
hand, escapes the supreme difficulty of discrimi- 
nation of the origins of special forms of gain, and, 
on the other hand, can be shown to have a genu- 
ine, rapid, and accurate tendency to discover and 
settle upon the various portions of incomes which 
are unearned in the sense that they furnish no 
necessary inducement to owners of factors of pro- 



THE THEORY OF SURPLUS VALUE. 333 

duction to put these factors to their best economic 
use. 

But while our investigation of the incidence of 
taxation exhibits the superior economy of direct 
taxes upon monopoly revenues or other unearned 
elements in income wherever they can be ascer- 
tained and measured, and approved a general grad- 
uated income tax upon the ground that it will 
discover and settle upon such elements of income, 
the condemnation of .specific or even of ad valorem 
taxes upon commodities must not be misunderstood. 
We have seen that a monopolist appears to exer- 
cise a power to resist both these latter forms of 
taxation of monopolised commodities by restrict- 
ing production and raising prices. By raising 
prices he appears to shift a portion, if not the 
whole, of the tax he nominally pays, on to consum- 
ers. But following the line of reasoning laid 
down in our discussion of the attempt to tax sub- 
sistence wages for an old age pension scheme, we 
perceive that such enhanced prices paid by con- 
sumers living on subsistence wages or subsistence 
rate of interest, have the effect of raising the 
money payments for subsistence, and thus of trans- 
ferring the tax up to other persons who must 
eventually pay it out of unearned elements of 
income. To shift a tax upon to " the consumer," 
as we have seen, is no final determinant of inci- 
dence : a tax must always be deemed to settle 
upon some element of income ; the power of sub- 



334 THE ECONOMICS OF DISTRIBUTION. 

sistence payments to resist taxation we have seen 
is absolute so long as there exist unearned ele- 
ments of income upon which they can be placed. 
The particular monopolist, therefore, can only re- 
sist specific or ad valorem taxation of his monopo- 
lised articles by imposing the tax upon the unearned 
incomes of certain classes of consumers, and not 
by distributing it over all classes of consumers. 
The same general principle applies to all taxation 
of commodities, monopolised or free : no such tax 
can settle upon incomes which are subsistence pay- 
ments for factors of production, until all forms of 
unearned income have been exhausted. 

The chief condemnation of such forms of indi- 
rect taxation is not that they are liable to be paid 
indiscriminately by rich and poor, by those who can 
and those who cannot bear them, but that they 
tend in many cases by checking production to 
restrict the most efficient use of factors of pro- 
duction, and so to decrease the general output of 
commodities. 

If this analysis be correct, the practical impor- 
tance of its conclusions is very great. By indi- 
cating the existence of a vast " surplus " of rents 
analogous to the economic rent of land in its 
taxability, it strengthens immensely the economic 
means of social progress. By exploding two fal- 
lacious notions, that taxes are paid by the poorer 
classes of the working population, and that high 
taxation is injurious to trade, our analysis removes 



THE THEORY OF SURPLUS VALUE, 335 

chief barriers to that increase of taxation and of 
wise public expenditure which are essential to a 
sound progressive social policy. 

§ 10. Differential rents play so considerable a 
part in determining the inequality of incomes in 
an industrial society that it may be well to append 
to this discussion of their taxability some consid- 
erations of a more general character. 

A progressive social economy is by no means 
confined to the difficult, sometimes hazardous, and 
always wasteful processes of taxation in order to 
procure for society some of these differential pay- 
ments which are shown not to be necessary in- 
ducements to their recipients to take part in 
production. More enlightened methods of pro- 
duction, increased equality of economic oppor- 
tunities, organisation of employers or of workers, 
will often succeed in effecting large reductions 
of differential rents. In respect of land this was 
seen by Ricardo and explicitly stated by J. S. 
Mill,^ who argued that improvements of agri- 
cultural science or of means of carriage which 
increased or rendered more available the output 
of more fertile farms would, by rendering it no 
longer profitable to work farms on the margin 
of cultivation, raise that margin and so reduce 
differential rents. In similar fashion the differ- 
ential rents or interests of capital may be reduced 
by such organisation of employers or of workers 
1 Principles, Bk. IV, Ch. Ill, § 4. 



336 THE ECONOMICS OF DISTRIBUTION. 

as throws a larger proportion or the whole of a 
trade into the hands of the largest, best-equipped, 
and most profitable firms. 

Where an organisation of employers by organis- 
ing a syndicate or a trust achieves this result by 
weeding out the weaker mills, it commonly suc- 
ceeds in preventing this economy of differential 
rents from passing to the consuming public in the 
shape of lower prices, and, instead, substitutes a 
monopoly or scarcity rent for these differential 
rents. But none the less is it true that this 
"weeding out" or "crushing out" of feebler com- 
peting firms signifies a reduction of the differ- 
ential rents which were formerly necessary to 
keep the requisite supply of capital in operation. 
The more far-sighted labour leaders are quite 
aware that their true interests lie in promoting 
this same improvement of trade organisation, pro- 
vided that they can maintain among employers 
such competition as will enable them to take in 
a rise of wages the reduction of differential rents. 

This policy, indeed, forms one of the stoutest 
arguments in favour of that attempt to acquire 
by legislation, or by trade unionism, a recognised 
standard of subsistence, of hours of labour, and 
of other terms of employment. This movement 
for better conditions of employment, implying a 
rise in current expenses of production which seems 
to press unendurably upon the weaker employers, 
is thus seen to be a positive instrument of eco- 



THE THEORY OF SUBPLUS VALUE. 337 

nomic progress. Upon this topic Mr. and Mrs. 
Webb thus write : " It is obviously to the inter- 
est of the trade union so to fix the common rule 
as to be constantly ' weeding out ' the old-fash- 
ioned or stupid firms, and to concentrate the 
whole production in the hands of the more effi- 
cient ' captains of industry,' who, however, have to 
lower the cost of the product without lowering the 
wage. Thus, so long as the more advantageously 
worked establishments in the trade are not work- 
ing up to their full capacity, or can, without losing 
this advantage, be further enlarged, the trade 
union could theoretically raise its common rule, 
to the successive exclusion, one after another, of 
the worst employers, without affecting price or the 
consumers' demand, and therefore without dimin- 
ishing the area of employment. By thus ' raising 
the margin of cultivation,' and simultaneously in- 
creasing the output of the more advantageously 
situated establishments, this device of the com- 
mon rule may accordingly shift the boundary of 
that part of the produce which is economically of 
the nature of rents, and put some of it into the 
pockets of the workmen." ^ 

The failure of most economists to recognise the 
large proportion of "forced gains" and scarcity, or 
differential rents, which are included in the net 
profits of a trade, is chiefly responsible for the tone 
of disparagement in which even the most liberal 
1 Industrial Democracy, Vol. II, pp. 729-30. 



338 THE ECONOMICS OF DISTRIBUTION, 

minded amongst them speak of the economic effi- 
cacy of trade-union efforts to raise wages. That 
wages at any given time are fixed absolutely by 
the operation of economic laws which are immuta- 
ble, few would now contend, but even Jevons and 
Professor Marshall, while generally favourable to 
trade unionism, are apt to deny its validity when 
they come to apply economic reasoning. " The 
power of unions to raise general wages by direct 
means is never great," writes Professor Marshall,^ 
while Jevons boldly affirmed that, though organisa- 
tion might enable one class of workers to increase 
this wage, this increase was paid for by other 
classes in their capacity of consumers.^ The gen- 
eral tendency is to insist that trade unionism is 
confined, so far as efficacy in raising wages is con- 
cerned, to securing rises that are already justified 
by increased prices and profits, and to obtaining 
such rises as are attended by a correspondent in- 
crease of productivity of labour, such increase, for 
example, as is sometimes claimed to follow a rais- 
ing of the standard of comfort. 

Our analysis, if it be correct, involves the recog- 
nition of a great fund of surplus profits, which is 
available for higher wages, as it is also amenable 
to taxation, and which can be obtained by a suffi- 
ciently strong pressure of trade unionism. 

In other words, forced gains and differential 

1 Elements of Economics of Industry (1892), pp. 407-8. 

2 The State in Belation to Labo'ar, pp. 105-7. 



THE THEORY OF SUEPLUS VALUE. 339 

rents of capital are not permanently necessary 
payments to the owners of capital who take 
them, and may be transferred, either to the 
public by taxation, or to the workers by a rise 
of wages. It is not difficult to see that differ- 
ential rents of labour, mental or manual, may 
be reduced or transferred in similar ways. Pri- 
mary public education has had a plainly recognised 
effect in reducing the differential rents of ordinary 
clerical employments. Technical education, in so 
far as it extends to larger social areas the oppor- 
tunity of successfully learning high-skilled and 
well-paid trades, makes in the same direction. In 
fact, every enlargement of education, in so far as it 
makes for greater equality of economic opportuni- 
ties, tends to reduce differential rents of employ- 
ment and likewise the marginal specific rents which 
are seen to depend upon them. If the marginal 
physician is better paid than the marginal corn- 
porter, it is not because of any greater inherent 
skill in the former calling which gives its services 
a higher marginal value. We pay the marginal 
physician a relatively high fee because the present 
distribution of economic and educational oppor- 
tunities is such that only a small proportion of 
the population can equip their sons for competi- 
tion in that market, hence the competitors, by 
fairly close organisation, can maintain a high rate 
of piece wages. The high rate does not depend 
on a natural scarcity of high skill. When it is 



340 THE ECONOMICS OF DISTRIBUTION. 

made as easy to any lad who has the desire to pre- 
pare himself for medicine as it is to become a dock 
labourer, the piece wage for the former work will 
be as low and probably lower than the piece wage 
for the latter, so far as the marginal labourer is 
concerned. Even those high fees which pro- 
fessional talent of a distinguished rank can draw 
will be greatly cut down when every career is 
open to natural talent from any social or economic 
grade. A distinguished specialist in surgery may 
now take a fee of XIOOO for a single delicate opera- 
tion. He will not now do it for less because he 
can actually get this sum. But his ability to get 
it depends on two facts, one relating to supply, 
the other to demand, neither of which is a per- 
manent necessity. The first fact consists in the 
limitation of supply of finest surgical talent by 
reason of the exclusion of most children from any 
opportunity to discover such a talent, to educate 
it, and to enter upon a medical career. Destroy 
this artificial limitation of supply, and instead of 
one surgeon able and willing to do this job we 
should have three or four upon a fairly equal level 
of skill and reputation, whose competition direct 
or indirect, would bring down the fee from £1000 
to say £20. On the other side, there is the fact 
of the existence of a certain number of very wealthy 
people who, drawing large elements of unearned 
income from various rents, can afford to pay 
XIOOO. Every equalisation of economic oppor- 



THE THEORY OF SURPLUS VALUE. 341 

tunities, each application of sound principles of 
progressive taxation, will reduce this number, and 
reduce the effective demand for work at such a 
price. 

Thus it is seen that there is nothing inherent or 
immutable in these differential rents of ability 
which are sometimes regarded as a necessary re- 
ward for superior skill which cannot be refused or 
materially reduced. 

§ 11. I have for convenience reserved for a spe- 
cial, separate consideration those payments to which 
Professor Marshall gives the name "quasi-rents." 
He has done more than any other economic writer 
to break down the barrier which has separated land 
from other factors of production, and to extend 
the name and the application of the Law of Rent. 
The rent of land is to him " no unique fact, but 
simply the chief species of a large genus of eco- 
nomic phenomena," and he recognises " that there 
is a continuous gradation from the true rent of 
those free gifts which have been appropriated by 
man, through the income derived from permanent 
improvements of the soil, to those yielded by farm 
and factory buildings, steam engines, and less dur- 
able goods." ^ 

A careful consideration of the chapters in which 
the theory of quasi-rents receives full treatment,^ 
shows that the quasi-rents are analogous, not to 

1 Bk. VI, Ch. IX. 

2 (Bk. V, Chs. VIII, IX, and Bk. VI, Ch. IX.) 



342 THE ECONOMICS OF BISTBIBUTION. 

differential rents of land, but to scarcity rents. 
First to illustrate his meaning he takes the cases 
of a find of meteoric stones and of the ownership 
of the pictures of a dead artist. Here we have 
an absolute monopoly selling at a monopoly price 
and yielding what Marshall terms a "true rent." 
A tax upon such articles falls entirely on their 
owners. If, however, by labourers' search other 
meteoric stones could be found, or if we were deal- 
ing with the pictures of a living artist who still 
continued to produce, the monopoly price or rent 
would only last for a short season, since it would 
serve to stimulate such exertion and would equate 
supply and demand at ordinary expenses of pro- 
duction. But while the higher price lasted, the 
stones or pictures might be regarded as yielding a 
quasi-rent. In other words, a quasi-rent or mo- 
nopoly element would figure in short period or 
market-price, and would gradually disappear as 
the period was lengthened and what is commonly 
termed a normal price was reached. Any supply 
of highly specialised capital, ability, or labour, 
which cannot be quickly and widely replenished, 
may for a season stand in the position of being 
able to take, in addition to ordinary rate of profit, 
a quasi-rent which must, however, disappear when 
the lapse of time brings into the market a suffi- 
cient number of new forms of specialised capital 
and labour. 

Now it is evident that these quasi-rents marking 



THE THEORY OF SUEPLUS VALUE. 343 

short-time monopolies are nothing else than the 
more variable forms of monopoly or scarcity rents 
of capital and labour, and it is not easy to under- 
stand why the disparaging epithet " quasi " should 
be appended to them. So long as they exist they 
are as true rents as any land-rents, nor are they 
necessarily of brief duration : highly specialised la- 
bour and capital are frequently able, by checking 
investments of outside capital and labour, to hold 
up market-prices above " marginal expenses of 
production " for long periods. Some of these 
monopolies may be as stable and as strong as 
the monopolies of natural resources which are 
admitted to draw true rents. 

It appears that these quasi-rents are simply less 
enduring forms of monopoly rent. The test of 
rent commonly accepted is this. Will it bear a 
tax ? Marshall asserts in one passage that wealth 
drawing quasi-rents is taxable. "A tax on any set 
of things that are already produced falls exclu- 
sively on the owners of those things, if it is not ac- 
companied by a tax, or the expectation of a tax, on 
the production of, or bringing into use of, similar 
or rival things. If it falls also on all rival things, 
and the supply of them is not absolutely fixed, its 
incidence will be gradually transferred to the con- 
sumers. . . . For a shorter period in which the 
tax falls mainly on the owners, the income may be 
regarded as more or less of the nature of rent." ^ 
1 Bk. V, Ch. VIII, par. 2. 



344 THE ECONOMICS OF DISTBIBUTIOm 

Under the class " quasi-rent " come tlie earnings 
of improvements of land,^ buildings, machinery, 
etc., 2 nearly all the profits of business institutions,^ 
and in one passage it is suggested that all " skill, 
material capital, and business connections" when 
and in so far as they are specialised, " cease to 
exert a direct influence on the value of the prod- 
ucts due to them; and, on the other hand, the 
value of these products . . . determines the in- 
come which can be derived from these factors, i.e. 
it determines what we have called their quasi- 
rent."* 

§ 12. Now Professor Marshall does not explic- 
itly discuss this theory of Quasi-rents in relation 
to taxation, though a passage previously quoted 
seems to signify that they are taxable. But Mr. 
Cunningham, in a discussion of these quasi-rents, 
considers that not merely are they directly amen- 
able to taxation, but that a tax upon products 
into which they enter will lie upon them. Ac- 
cording to him, the profit upon capital that is 
" irrevocably fixed " is " of the nature of rent," 
and he concludes by saying, " It follows from 
what has gone before that a tax on production 
will affect price in so far as it is not paid out of 
that part of price which is of the nature of rent. 
And whenever a tax is laid upon production, 
whenever it can come out of rent, it will do so." ^ 

1 pp. 665, 459. 2 p. 670. » p. 659. ^ p. 655. 

^ Economic Journal, March, 1892. 



THE THEORY OF SURPLUS VALUE. 345 

Now it is certainly true that forms of capital 
which are "irrevocably fixed" are in the first 
instance liable, like rent of land, to bear a specific 
or an ad valorem tax upon the products to which 
they contribute. But it by no means follows that 
they cannot recoup themselves by causing a rise 
of prices. Take the case of the interest on capital 
sunk in houses ; houses already built would not 
be withdrawn from supply if the interest upon 
the sunk capital fell toward zero, but it is equally 
certain that a tax upon houses could not and 
would not be borne by this capital. For there is 
a constant flow of fluid capital toward houses so 
long as this capital is able to earn normal interest, 
which flow would be checked ^ by a tax upon the 
capital already " irrevocably appropriated " in the 
form of houses. In one passage Mr. Cunningham 
does seem to admit that the taxation of quasi-rents 
might affect price and production, but he urges 
that it would do so "very slowly after a time." 
Now this is not correct ; in any trade open to 
investment and vitally sustained by a flow of 
capital from without, the effect of taxing the 
quasi-rents of fixed forms of capital would be 
rapid and immediate. It is only when such "ir- 
revocably appropriated " capital enjoys a power of 

1 This check might operate either by a restriction of saving 
in case the tax reduced the rate of interest below that required 
by the marginal saver, or it might divert new capital from 
building into other forms of investment. 



346 THE ECONOMICS OF DISTRIBUTION. 

monopoly, derived from checking the flow of out- 
side capital, that the profits on fixed capital will 
be unable to resist taxation on production. If 
the breweries of a district have a corner upon the 
supply of public houses, so that interests on fixed 
capital in brewing are 2% higher than normal out- 
side interests, that 2% is indeed amenable to taxa- 
tion, but it is so amenable, not because it takes 
the form of "irrevocably appropriated capital," 
but because the interest of such capital enjoys 
a power of restricting the infloAV of outside capital 
and so of earning a special rate of interest. This 
special interest is what I term " a forced gain or 
scarcity rent." It may be included in the quasi- 
rent of Professor Marshall, but it differs vitally 
from the ordinary interest on fixed capital in 
being unable to resist taxation by raising prices. 
In the supposed case, a tax upon beer would fall 
upon the 2% excess interest and could not be 
recouped by raising prices ; it could not fall upon 
any further part of the interest without reducing 
brewing profit below the normal rate and prevent- 
ing the fresh influx of capital required to sustain 
a growing trade, or even to maintain a deprecia- 
tion fund. 

The mere fact, then, that capital or labour is 
specialised and cannot be withdrawn does not en- 
title us to regard the earnings of such specialised 
factors as a surplus, so long as the industry is 
open to fresh investments of capital and labour. 



THE THEORY OF SURPLUS VALUE. 347 

A tax will not lie upon these specialised forms, 
but will be transferred to the consumer by en- 
hanced prices to be bore ultimately by such " con- 
sumers " only as enjoy some unearned elements of 
income. Only in cases where some natural or 
economic power restricts the inflow of capital 
or labour will the earnings be rightly regarded 
as a surplus and liable to bear taxation ; and in 
such a case the tax, so far as it falls upon interests 
or wages which are results of monopoly, and are 
in excess of " competition rates," will not be con- 
fined to the capital which is "specialised." In a 
word, the specialisation of capital or labour is not 
really a condition which assimilates its earnings 
to rent. 

§ 13. These quasi-rents, then, in so far as they 
are rents at all, are monopoly or scarcity rents 
and are liable to taxation. They also enter into 
prices, for we have seen that wherever a scarcity 
rent exists, the marginal portion of supply is able 
to obtain it, and it will figure in supply prices. 
Professor Marshall indeed denies that they enter 
into price, but when the marginal labourer in a 
class of labour or the marginal mill in a particular 
industry obtains a higher wage or a higher interest 
than " free competition " would assign, that mar- 
ginal wage or interest must figure in expenses of 
production and in price. It can only be excluded 
by the fallacious " dosing " application of the Law 
of Diminisliino' Returns. 



348 THE ECONOMICS OF DISTRIBUTION, 

Professor Marshall himself illustrates a " quasi- 
rent " of labour by the high wages miners drew in 
1873. Now it would scarcely be possible for him 
to affirm that the high piece wages then paid did 
not "enter into" the price of a ton of coal, for 
every ton of coal paid this piece wage. If it be 
admitted that the quasi-rent here " enters into " 
the price of coal, it may be contended that it does 
not help to determine the price of coal, but con- 
sists in a surplus which remains after the neces- 
sary "expenses of production " are defrayed from 
the price. But even here the denial that the 
quasi-rent helps to determine the price is a mere 
verbal quibble. For the quasi-rent is a direct 
measure of the pressure of scarcity, which is as 
much, and in the same sense, a determinant of 
value and of price as the utility measured by 
demand. The quasi-rent is under the circum- 
stances a necessary payment of marginal labour, 
it is not a mere surplus in the sense that it takes 
what remains after expenses are paid out of price, 
for that implies that price is determined exclu- 
sively from the demand side, which, as we have 
already seen, is not true, even of the closest mo- 
nopolies. The quasi-rent of the miner not only 
enters price, but helps to determine price. It is 
true that it is also determined in its amount by 
price, but this only means that it is one of a 
number of mutually determinant factors of price. 

If, however, the quasi-rent of miners enters 



THE THEORY OF SURPLUS VALUE. 349 

price and helps to determine price, the same is 
true of every other quasi-rent of labour, capital, 
or ability. It is only differential rents, whether 
" true rents " or quasi-rents, which do not enter 
into or determine price, because they form no part 
of the expenses of the marginal supply. 

Such, then, of these quasi-rents as deserve to 
have the term "rent" applied to them should 
receive it without the timid justification of quasi. 
They are to all intents as much true rents as the 
scarcity rent of land, entering price as an addition 
to marginal expenses and being unable to resist 
taxation. 

§ 14. We have seen that elements of forced 
gain marking superiority of bargaining power 
arise in all the processes of exchange, and that 
an accurate analysis of the payments for finished 
commodities would disclose a large number of 
such " gains " payable to owners of factors of pro- 
duction at various stages. Our investigation of 
the markets for the use of the several factors 
indicates that, while any of these factors may 
assume this position of superiority of bargaining, 
there is no warrant for supposing it to be equally 
distributed among them, even in the long run. 

A closer regard to the actual mechanism of 
modern industry seems to indicate that an increas- 
ing proportion of this power to take " forced " 
gains adheres to the class called entrepreneurs, or 
undertakers, and is included under the vague 



350 THE ECONOMICS OF DISTRIBUTION. 

title of profits. The undertaker is sometimes the 
owner of one of the factors of productive capital 
or business capacity, or both, who buys the use 
of the other factors, and, organising them for 
productive purposes, is able to sell the products 
upon terms which are highly "profitable." These 
profits, in so far as they exceed necessary interest 
and necessary wages of management, consist of 
" forced gains," not necessarily extracted entirely 
out of bargains with labourers, but partly perhaps 
by bargains with owners of capital, and partly by 
restriction of free competition in the markets in 
which he disposes of the products. 

The typical form of private business to-day is 
one in which the undertaker buys in the cheapest 
market each of the factors of labour, capital, and 
land which he requires, and organising their uses 
for production, sells the product in the dearest 
market he can command. Our analysis of the 
relation of buyers and sellers indicated that 
the buyer was in modern industry normally 
the stronger bargainer, so that the undertaker 
may well exert a power to take " forced gains " in 
his bargains for the use of labour and capital. The 
real crux lies in the question, "Can he retain for 
himself these gains when he assumes the position 
of seller in disposing of his products ? " Where 
competition is said to be free, he cannot, and must 
hand over to consumers such portions of his 
" forced gains " as are not swallowed up in ex- 



THE THEORY OF SUBPLUS VALUE. 351 

penses of competition. He can only hold these 
" forced gains " by restricting freedom of compe- 
tition in markets where he is seller. Hence, 
everywhere he is devoting his energies to one of 
two policies. Arranging price-lists by agreement 
with competitors, entering into closer agreements 
with these competitors, and eventually organising 
alliances, syndicates, or trusts, he labours to 
strengthen the bargaining power of his " trade " 
in these dealings with middlemen or consumers. 
Or else he strives, by striking out some slight 
novelty in goods or by securing a supremacy over 
a particular part of the market, to be able to 
evade the superior bargaining power which nor- 
mally belongs to the buyer. 

His success in achieving these results is the 
dominant feature of modern industry so far as the 
distribution of wealth is concerned. There is 
good reason to believe that an increasing propor- 
tion of " forced gains " or " unearned income " 
continually assumes the form of the business 
profits of undertakers. 

Even where formally it is capital that takes the 
initiative, as where a number of capitalists pool 
their capital and form a joint-stock company, capi- 
tal buying the use of labour and law and manage- 
ment, a closer scrutiny will generally disclose the 
fact that the real gains of such an enterprise are 
absorbed, often by anticipation, by one or two 
business men who as financiers, promoters, or 



352 THE ECONOMICS OF DISTBIBUTION . 

managing directors, have organised the business 
in their own interests. 

The recognition of these " forced gains " or sur- 
plus elements in price involves important conse- 
quences in considering methods of social reform. 

§ 15. If price contains no surplus beyond neces- 
sary payment of money costs, the arguments, by 
which not merely " old " economists, but so mod- 
ern an economist as Jevons, proved the futility 
of trade-union organisation in seeking to achieve 
a general rise of wages, would be valid. If the 
profits of the marginal supply of capital are kept 
at a minimum in all classes of investment, it will 
be evident that a rise of wages (unless attended 
by a corresponding increase of efficiency of la- 
bour) would be impossible, and any attempt to 
extort such a rise would be injurious. A simi- 
lar condemnation must be passed upon the eight 
hours' movement, or upon any other progressive 
movements which would raise the wage bill. The 
portion of the real income of the nation which 
went as differential rents to owners of land or 
capital or ability, could not be touched by such 
a policy. In other words, differential rents do 
not constitute a surplus value. But marginal 
rents, which enter into price, do constitute such 
a surplus. 

We have seen that, if a single business in a 
trade, owing to exceptional advantages, is earning 
a higher rate of profits than others, it is not pos- 



THE THEORY OF SURPLUS VALUE. 353 

sible, under normal conditions, for the employees 
to take this profit in higher wages ; if by special 
organisation of a group it were possible to take 
the whole or part of it, it would only pass from 
being a differential rent of capital into a differ- 
ential rent of labour, i.e. a certain group of 
workers would have established a sectional mo- 
nopoly in a labour-market. If, on the other hand, 
a whole trade were earning a higher profit than 
was necessary to keep the required capital in the 
trade, a surplus exists, which can raise the price 
of labour for a whole market, provided labour is 
sufficiently well organised to take it. If it can be 
shown that not merely do certain trades rise for 
brief seasons into the condition of earning surplus 
profit, but that other trades, by reason of special 
limitations upon the field of investment, are per- 
manently in that condition, the existence of a 
large element of surplus profit gives to the labour 
movement that firm economic basis of support 
which otherwise is lacking. 

§ 16. Karl Marx was right in his insistence 
upon the fundamental importance of recognising 
the idea of surplus value. He was wrong in re- 
garding the surplus value as exclusively the pro- 
duct of labour-power taken by capital in the 
process of bargaining for the sale of labour- 
power. He failed to explain why labour, alone 
of the factors, should be conceived as making all 
the " value " of material marketable goods. He 



354 THE ECONOMICS OF BISTBIBUTION, 

failed also to explain wliat the nature of the power 
was by which capital took the surplus value made 
by labour ; and, finally, he failed to show how any 
individual capitalist who took it was not compelled 
to relinquish it under the stress of competition 
with his fellow-capitalists. 

The surplus value here described issues, not 
merely from one class of bargains (between capi- 
tal and labour), but from every class ; it represents 
the economic might of the stronger in every mar- 
ket. The true economic motive of the organisa- 
tion alike of labour and of capital is to establish 
such a power of bargain at some point or other in 
the field of industry as to obtain some of this sur- 
plus. Capital, by various processes, limits free 
competition ; price-lists and other trade agree- 
ments regarding prices and wage-rates, corners, 
and other temporary coups, syndicates, amalgama- 
tions, trusts, are all endeavours to enable the capi- 
tal in a given market to obtain a rate of profit 
above the necessary minimum, by raising prices, 
reducing wages, or both. So far as capital suc- 
ceeds, these higher profits are represented in 
market-prices which exceed the economically 
necessary money-costs of production. 

The organisation of labour must also be con- 
sidered to be directed, in the main, by a similar 
motive. So far as trade unionism is confined to 
protecting a class of labour against specially in- 
jurious conditions of low wages, irregular employ- 



THE THEORY OF SURPLUS VALUE, 355 

ment, and other risks imposed by the greed or 
carelessness of employers, and in thus securing 
a bare maintenance for labour, we are entitled to 
discriminate trade unionism from organisation of 
capital. But trade organisations in most skilled 
trades are evidently devoted, not to a merely pro- 
tective policy, but to a strengthening of their capac- 
ity for bargains by restricting competition in the 
labour-market, so that they may obtain in higher 
wages or increased leisure a surplus corresponding 
in nature to the higher profits of capital. 

In every process of production where capital, 
labour, and land are employed, one or other, 
whether by organised contrivance of its owners, 
or else by what may be termed accident, is apt to 
be relatively short in supply : in such case the 
whole supply of this factor will take a price 
containing a "surplus" element.^ Where many 
different sorts of capital or labour or land are 
required to contribute directly or indirectly to a 
given process, a number of these elements of 
surplus will emerge, attached sometimes to one, 
sometimes to another factor. So if we followed 
the raw material of any commodity from its 
earliest extractive stages to the final form it 
received as it passed over the retail counter, we 
should find it gathering, not only " costs " of pro- 

1 I.e. the final seller in the market for the use of this factor 
of production will be stronger than the final buyer, and will 
extract a large element of " forced gain." 



356 THE ECONOMICS OF BISTBIBUTION. 

duction, but surplus elements at various stages 
of its advance, the final price of the commodity 
containing the aggregate of these costs and sur- 
pluses. 

The price of any ordinary material commodity 
of a complex order will probably contain scores of 
these elements derived from the component prices 
of the productive goods and of portions of the 
services of land, labour, and capital, which have 
contributed to the final result. 

In any given condition of industry, land, labour, 
and capital will probably all share in this surplus, 
but in very different proportions. Our general 
analyses of the bargaining powers of owners of 
land and of many kinds of capital indicate that 
in the bargains for the use of these factors their 
owners will normally occupy the stronger position, 
whereas in the bargains for the sale of labour- 
power, the sellers (save in special cases where 
they are aided by monopoly of skill or economic 
opportunity) will be weaker than the buyers. If 
the large portion of surplus which passes to the 
commercial entrepreneur and the financial classes 
be regarded as wages of management rather than 
as interest upon the capital which they operate, 
these grades of skilled labour must be regarded 
as possessed of a monopoly of business opportuni- 
ties which assigns high marginal rents of labour 
to the work they undertake. 

The fact that among these entrepreneur classes, 



THE THEORY OF SURPLUS VALUE. 357 

as also among the professional classes, some indi- 
viduals fail to make a living, while among those 
who succeed there is the widest variety of success, 
must not blind us to the inequality of economic 
and educational opportunities which secures for 
these and other forms of skilled work marginal 
rates of remuneration that measure the strength 
of the protection which is applied to them. 

§ 17. Surplus value, then, is not something which 
emerges in the dealings of capital with labour or 
of land with labour; it emerges in every competi- 
tive bargain and adheres to the stronger bar- 
gainer; it is only because in modern industry the 
owner of capital, land, or business capacity is nor- 
mally found to be the stronger bargainer, that he 
obtains most of the surplus. Labour, even manual 
labour in certain markets and at certain times, 
shares this surplus, takes in wages what is not 
essential to the maintenance of labour-power. 
The fact that the labourer gets so little as com- 
pared with the capitalist, landowner, and entre- 
preneur^ ought not to lead us to adopt a false or 
one-sided theory of the origin and nature of sur- 
plus value. The amount and the proportion of 
the surplus which goes to the owners of the sev- 
eral factors will be determined by two general 
conditions closely related to one another; (1) the 
character of consumption; (2) the growth of in- 
dustrial arts in relation to natural conditions of 
supply. It is needless here to rehearse the chief 



358 THE ECONOMICS OF BISTBIBUTION, 

laws that govern these forces. It must suffice 
briefly to summarise the influence which these 
forces exercise upon distribution of the surplus. 

(1) In a community where a rapid growth of 
population, or a low order of individual culture, 
causes a larger increase of effective demand for 
common articles of food and other material goods 
than for intellectual, artistic, and, in general, more 
qualitative goods, the owners of sources of raw 
materials and the organisers of manufacture and 
of transport machinery will find the requisites 
they own to be ever in larger demand, and the 
proportion of surplus or " marginal rents '/ which 
accrues to them will be larger. Whereas, in a 
community where the demand for large masses of 
material goods was subordinated to a growing 
demand for highly qualitative goods, either mate- 
rial or non-maiterial in character, the demand for 
land, machinery, and capital in general would be 
reduced, the demand for skilled manual and men- 
tal labour increased, and the surplus would tend 
to be distributed in accordance with the new 
conditions. 

(2) Changes in the industrial arts will obvi- 
ously affect distribution of the surplus by giving 
a greater or a less importance to one or other of 
the factors. The application of machinery and 
steam-power is, of course, a most familiar example 
of a substitution of capital for labour in the pro- 
duction of a given quantity of many classes of 



THE THEORY OF SURPLUS VALUE. 359 

goods. But, as we have seen, the Law of Substi- 
tution has countless applications; new materials, 
new sources of supply of old materials, the open- 
ing of new fields of cheap labour, the training of 
large quantities of skilled labour, new processes 
or methods of industrial organisation, — all these 
familiar movements change the balance of power 
in bargaining among the different classes of own- 
ers of capital and labour- power who contribute to 
the production of a commodity, and so affect the 
distribution of the surplus. 

§ 18. We may briefly sum up our reasoning as 
follows: Distribution consists in, or is conducted 
by, the process of fixing market-prices, the price 
of goods in the various stages of production, and 
the price of the use of the various forms of land, 
capital, and labour, which' are serviceable in pro- 
duction. The sales of goods, of land-use, capital- 
use, or labour-power in the various markets, are 
conducted by a process of bargains which does 
not even tend to an equal division between each 
pair of bargainers of the gain of the bargaining, 
being determined in part by the superior economic 
strength or cunning of the marginal buyer or 
seller, in part by the differential estimates of the 
several buyers or sellers as measured from the 
margin, which estimates are themselves referable 
to a complex of unequal needs and economic 
opportunities in the various bargainers on either 
side. 



360 THE ECONOMICS OF BISTMIBUTION. 

In a very large proportion of these bargains one 
side is notoriously the stronger, forcing a sale upon 
conditions which give to its members almost the 
whole gain of the bargain, leaving to the weaker 
only a minimum inducement. So far from com- 
petition being free, it is fettered and impeded 
everywhere by the growth of innumerable forms 
and degrees of monopolies and forced gains. The 
theory that the enlightened self-interest of pro- 
ducers keeps down normal prices to the bare 
expenses of production, and that in consequence 
the whole gain of modern industrial improvements 
filters down to the community in their capac- 
ity of consumers, is seen to be quite unwarranted. 
Indeed, the whole notion of the consumer as re- 
siduary legatee is as groundless in theory as in 
practice. There exists no such fourth party in 
the working of distribution : the various owners 
of land, capital, and labour take each according 
to his strength. Thus emerges the true surplus 
value, derived not from some vague, unintelligible 
idea of tyranny, but from the various hindrances 
to perfect equality of bargaining-power in the 
owners of the various factors of production and 
the consequent establishment of different forms 
and pressures of economic force. 

The recognition of this force explains the 
opposing theories and policies of economics. For 
the imperfection of equality of competition may 
be met and overcome by securing equality of eco- 



THE THEORY OF SURPLUS VALUE. 361 

nomic opportunity for individuals. This is the 
idea of laissez-faire economists, though they have 
commonly, or perhaps universally, failed to pro- 
vide or even to advocate equality of opportunity 
for obtaining possession or use of land and capital. 
Or else, recognising the difficulty or the impossi- 
bility of maintaining perfect equality in all depart- 
ments of economic activity by the free play of 
individual interests, we may allow such inequality 
to issue in " forced gains,*' and afterward attempt 
to redress this inequality by taxation. If this 
method of redress prove too difficult or too uncer- 
tain, economic progress will demand the substi- 
tution of a public monopoly for those private 
monopolies which inequality of economic oppor- 
tunity has founded, and to which inequality of 
bargaining assigns "forced gains." 



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